Currency analysts at Deutsche Bank, among the most gloomy on the euro's prospects against the dollar, now expect the currency to hold its ground in coming months before falling below parity with the greenback by the end of the year. George Saravelos, the bank's global co-head of foreign exchange research, said on Wednesday he now sees the euro at $1.08 at the end of the second quarter and $1.03 at the end of the third, compared to $1.00 and $0.98 previously.
There is a chance of a bounce to $1.10 in the coming months from $1.06 currently, before it resumes its slide towards Deutsche's long-held target of $0.95 by the end of the year, Saravelos said. "We are now becoming more cautious on further near-term weakness. We are turning tactically neutral and see risks of a squeeze to $1.10 over the next couple of months," Saravelos said in a note on Wednesday.
Over the longer term, the divergence between US and euro zone monetary policy will strengthen the dollar. The Federal Reserve may ultimately have to raise interest rates more than money markets currently expect, he said. But the lack of clarity on the White House's tax reform plans and the potential for US growth surprises to be on the downside in the near term could cap the dollar for now.
On the European side, political risks surrounding the French and German elections this year appear to be ebbing, while European Central Bank president Mario Draghi has signalled a willingness to incrementally turn more hawkish, Saravelos said. Deutsche is the world's fourth largest FX trading bank, seeing some 8 percent of the average $5 trillion-a-day flows, according to the last industry survey by Euromoney magazine.
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