The euro is expected to be one of the strongest G7 currencies in the coming quarters, according to M...
The euro is expected to be one of the strongest G7 currencies in the coming quarters, according to Michael Saunders, head of European economics at Citigroup.
Citigroup expects the euro to gain 5%-10% against the dollar and sterling and by more than 10% against the yen in the next six months.
Saunders said that for two and a half years the European Central Bank has had to set short rates against the backdrop of a generally falling currency.
A possible strengthening of the euro would be the result of reduced capital inflows into the US and UK plus a weakness in Japanese growth.
The currency economists at Citigroup expect the euro to rise to $0.91/E in six months and $0.95/E in 12 months. This is against the prior forecasts that the currency would be roughly range bound at $0.82/E in six months and $0.90/E in 12 months.
The group also expects the euro to gain against other currencies rising to £0.65/E and ¥123.5 in 12 months from the current £0.62/E and ¥109/E.
He added: 'This bullish view on the euro is based on the opinion that there are negatives for other currencies rather than a bullish view on euro-area growth. In particular, capital inflows to the US and the UK are likely to slow while the yen is vulnerable to ongoing weakness in economic growth.'
The ECB has often stressed that price pressures from the weak euro limit the room for monetary easing, said Saunders.
He added: 'A sustained rise in the euro would reinforce disinflationary pressures from the global economic slowdown.
'It is not clear if this would be enough to cause the ECB to eventually cut by more than the 25bp move that is our base case, but market speculation would probably go that way.'
He said that this would reinforce the likelihood that the short end will rally a bit more. He added: 'Last month we argued that the short end may temporarily overshoot normal measures of fair value.
'Since then, two-year swap yields have edged down from 4.4% to 4.3%, but yields are still not unusually low given the extent of the global slowdown and uncertainties about the timing and the speed of a pick up.'
In earlier cycles, the short end has usually continued to rally until lead guides to euro-area growth clearly turn up and such a turn is not yet evident, said Saunders.
He added: 'Moreover, even a modest uptrend in the euro may cause those old forecasts that the currency will rise to $1.10/E or higher to be dusted down again.
'The short end probably www.ifaonline.co.uk
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