There is nearly a one-in-three chance the euro will fall to parity with the dollar or lower in the coming year, a Reuters poll of foreign exchange strategists shows, even as doubts grow over when US interest rates will rise. Fears of deflation following a plunge in oil and commodity prices have pushed several central banks to cut interest rates in surprise moves in the past month, and the European Central Bank to launch a massive sovereign bond-buying programme.
Following the ECB's announcement last month that it will begin quantitative easing bond purchases in March, the euro hit an 11-year trough of $1.1098 on January 26. But the single currency has since gained almost 1 percent as a spell of weaker US data has dented expectations the Federal Reserve will hike the federal funds rate from a record low of 0-0.25 percent by June.
Strategists in the poll, published on Tuesday, gave a median 30 percent probability for euro/dollar parity or lower, with twelve of 42 respondents pencilling in a 50 percent or greater chance that would happen at some point in the coming year. The Reuters poll is the first in which anyone has predicted euro/dollar to fall below parity in the forecast horizon since September 2010. Back then, Greece had requested its first bailout and the sovereign debt crisis was starting to take hold. The last time the euro actually traded at $1 or below was in December 2002. Before that it had fallen below $1 in the first year of its existence in late 1999.
In recent years, it has held well above parity, trading at just under $1.40 in the middle of 2014. The almost universally held view has been that the euro would remain strong. But tepid growth in Europe, falling prices, a changing political landscape, and now, a completely divergent monetary policy path from the US Fed's have changed everything. "Even if the Fed does not hike rates the US is still the most attractive investment destination," said Nick Parsons, global co-head of FX strategy at National Australian Bank.
"What matters is relative growth rates and relative interest rate differentials. If the Fed doesn't hike, no-one will." According to the poll of more than 60 strategists, the euro is expected to fall to $1.13 by the end of this month and weaken to $1.11 in three months and to $1.10 in a year. The dollar ended 2014 up 13 percent against a basket of major currencies at 90.269, its best performance since 1997. It is now forecast to rally to 98.9 by the end of 2015 on an expected start to a Federal Reserve tightening cycle.
Like the Fed, the Bank of England is expected to begin raising interest rates from record lows later this year, although falling inflation has called the timing into doubt and the pound will struggle against the dollar. The British pound, trading around $1.52 earlier on Wednesday, was predicted to be at $1.50 in a month, $1.48 in six months and $1.49 in 12 months, weaker than the January poll's equivalent forecasts of $1.53, $1.52 and $1.51.
Against the euro, sterling will gain ground in the year ahead. The poll showed you will need 75.0 pence to buy one euro in a month, 74.1p in six months and 74.0p in a year. Last month the respective forecasts were 78.2p, 77.1p and 76.0p. Greenback strength is also likely to weaken the Japanese yen further to 122.0 per dollar in six months and to 125.0 in a year. That is almost unchanged from January's poll but weaker than Wednesday's trading level of 117.5 yen.
But currency speculators reduced bets favouring the dollar, according to data from the Commodity Futures Trading Commission released on Friday. The dollar had its worst trading day against major currencies since October on Tuesday as weakness in US data continued, with a reading on new orders for US factory goods falling sharply in December.
It was also a rare bad day in US Treasuries, with benchmark yields up 11 basis points, their biggest one-day rise in more than 14 months. Despite that, Treasury yields were not far from recent lows on fears of deflation spreading globally. So for the dollar, the recent sell-off may simply add up to a clearing of the decks before another push higher. While there are concerns dollar strength could hurt US economic growth, currency analysts still do not expect that to deter the Fed from hiking interest rates.
"The Fed staff have downgraded their estimate of the extent to which the appreciation of the dollar since last summer will restrain projected growth in real GDP, suggesting that dollar strength is unlikely to prevent Fed tightening," wrote analysts at Goldman Sachs.
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