Fewer and fewer currency strategists see the euro rising to the euro zone pain barrier of $1.30 in the year ahead, according to a Reuters poll, and many have trimmed forecasts for euro strength in coming months.
The euro dropped below $1.20 this week for the first time in four months and a Reuters poll of strategists predicts it trading unambiguously at Wednesday's rate of $1.2100 at the end of April.
The poll, taken between April 5 and 7, showed the number of strategists forecasting the euro to hit $1.30 or above some time in the coming 12 months had dropped to 22 out of 58 from 42 out of 60 in the last poll at the start of March. The median forecast shows the euro at $1.2350 by the end of June, rising to $1.25 by end-September and in 12 months' time - lower than March poll predictions of just under $1.29 on a three-month horizon and $1.28 and $1.26 over six and 12 months.
Michael Schubert at Commerzbank in Frankfurt, who predicts the euro will peak at $1.26 in three months and fall to $1.18 in a year, said concerns about the US current account deficit still dogged the dollar but he noted other factors were now at work.
"This is apparent from the euro's strong reaction to indications that the US employment situation is improving, combined with revised expectations regarding euro area and US money-market rates," Schubert said.
Higher than expected gains in US payrolls last week saw the euro fall two cents on the dollar as the improving labour market encouraged dollar bulls to start pencilling in possible dollar-boosting rate hikes later this year.
BRAKING AT $1.30: The single currency has twice stopped short of $1.30 this year, making record highs just above $1.29 in January and February.
Since then it has fallen on speculation about eurozone interest rate cuts and higher US rates and the damage its own strength could be doing to lacklustre economic activity in the eurozone.
Now, after a two-year dollar downtrend stoked by US current account concerns and low US interest rates, the market is trying to fathom whether its fortunes have turned.
"The basic mood seems to be one of scepticism about the dollar, even if this is meanwhile less marked," Schubert said.
Friday's payrolls offered a long-awaited hint that US interest rates might rise from 1.0 percent this year and lend the greenback the yield support dollar bulls have been seeking.
Niels Christensen at Societe Generale in Paris sees the euro at $1.30 in three months, falling to $1.25 in six months and then $1.20 over a one-year horizon.
"For a lasting rise of the dollar and fall of euro/dollar the March payroll report would have to be followed by other upbeat payroll reports in the months to come and given the unpredictability of past reports investors might be a bit reluctant to drive euro/dollar decisively lower," he said.
CONVALESCENT EUROZONE: While the US grew 4.1 percent on an annualised basis in the final quarter of 2003, the eurozone grew just 0.4 percent in the whole of last year.
Euro zone interest rates are just 2.0 percent and while European Central Bank President Jean-Claude Trichet backed away from a more dovish stance at last week's ECB meeting, some say the risk of lower eurozone interest rates has grown.
Recent business climate data from the region's largest economy, Germany, showed a bigger than expected drop, while surveys of eurozone manufacturers and services companies this month showed signs that growth may be slipping.
"On eurozone data, (the numbers) are weak. When we see weak data from the eurozone and strong data from the US economy, this will help the dollar in the long term," said Karioth Volker at Bayerische Landesbank in Munich.
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