Euro seen weakening as debt crisis weighs

The euro will lose most of the ground it has recently made against the dollar in the coming year, despite expectations for a rate rise from the European Central Bank, a Reuters poll of foreign exchange strategists showed.
The single currency lost almost 7 percent of its value against the dollar last year, its worst performance since 2005, but has regained almost 4 percent since the start of January, trading on Wednesday at $1.38.
But its path from here will not be smooth as the bloc's members endure a slew of fiscal austerity measures that will drag on growth, while the sovereign debt crisis that has already forced Ireland and Greece to seek international bailouts weighs on investors' minds.
"We look for the bullish trend to show signs of exhaustion towards the end of February as markets look ahead," said Kenneth Broux at Lloyds Banking Group.
Median forecasts from the poll of more than 60 analysts, taken this week, showed the euro at $1.35 in one month's time, dropping to $1.31 in six and then dipping to $1.30 by this time next year, largely in line with a poll taken last month.
"There is still risk of some retreat, as the EMU debt crisis is not over and escalating geopolitical risks may also be a source of volatility," said Roberto Mialich at UniCredit.
European Union leaders are expected to reach a deal in late March on reforming the region's rescue fund, conducting new, tougher bank stress tests, tightening fiscal discipline and improving economic policy co-ordination in the eurozone.
And while the European Central Bank is seen raising rates from a record low of 1.0 percent in the fourth quarter, it was a close call between then and the first three months of 2012 in a Reuters poll of 82 analysts published last week.
The US Federal Reserve is not expected to begin raising its own low rates until early next year, despite economists ramping up their growth expectations for the world's biggest economy.
The dollar is set to strengthen with the dollar index, which measures the greenback against a basket of currencies, seen ending this year at 80.2, up from its current level of 77.02.
The weighted index had a volatile 2010, starting the year around 77.64, peaking in June at about 88.71 and then finishing off the year just over 80.
Against sterling, the euro was seen weakening in the year ahead as increasingly upbeat data suggests the Bank of England might begin to raise interest rates sooner rather than later to combat inflation running at nearly twice its target. The euro is seen buying 85.3 pence in a month, 83.3p in six months and 82.9p in 12. In January's poll the respective purchasing strength was 85.0p, 83.3p and 82.5p.
Britain, whose economy surprised forecasters by contracting in the fourth quarter, has been enduring its own austerity cutbacks but figures on Tuesday showed manufacturing activity grew in January at its fastest pace since records began in 1992, while construction activity returned to growth last month.
The expectations for a rate rise and the upbeat numbers sent sterling to a three-month high of $1.621 on Wednesday.
The euro was seen more volatile against the dollar over the coming month. Analysts say the divergence of forecasts in Reuters currency polls offers a leading indicator of exchange rate volatility in the following month.