The most accurate foreign-exchange forecasters say the euro will depreciate against the dollar for a third straight year, equaling its longest slump since its creation in 1999, as Europe slips into recession.
Nick Bennenbroek, the head of currency strategy at Wells Fargo & Co., who topped the list for the third time in five quarters as measured by Bloomberg News, expects the euro to drop in the first six months to $1.24, from $1.2961 at the end of 2011. Westpac Banking Corp., which has had the second-lowest margin of error for two consecutive surveys, predicts $1.20, as measures by the European Central Bank fail to keep the region’s sovereign-debt crisis from worsening.
Two years after Greece admitted to misrepresenting its budget deficit, Europe’s debt crisis is infecting the region’s biggest economies, just as the U.S. shows signs of strengthening. Sovereign borrowing costs continue to soar even after the ECB, which meets this week, cut interest rates twice in the last two months.
“The European Central Bank will continue to ease aggressively in 2012 as recession approaches in Europe and the U.S. numbers remain resilient,” Bennenbroek said during a Jan. 4 telephone interview in New York. “All the fundamentals strongly argue for euro weakness.”
The euro was little changed at $1.2722 as of 7:17 a.m. in London after dropping 1.9 percent to $1.2717 last week and weakening from last year’s high of $1.4940 in May.
It depreciated 3.2 percent in 2011 and 6.5 percent in 2010, and was the worst performing currency of 2011 versus nine developed-nation counterparts as tracked by the Bloomberg Correlation-Weighted Indexes. The 17-nation currency lost 2 percent after erasing a gain for the year as recently as November as Greek and Italian lawmakers ousted their leaders, according to the gauge.
The most-bearish forecaster sees the euro at $1.17, while the most optimistic call is for a rally to $1.45 by mid-year. The median of the 40 estimates is $1.30 by 2013.
Euro-area leaders’ attempts to solve the region’s debt crisis, which led to bailouts of Greece, Ireland and Portugal, will continue at a meeting today between French President Nicolas Sarkozy and German Chancellor Angela Merkel in Berlin. Euro-area finance chiefs convene in Brussels on Jan. 23, with government leaders gathering a week later.
ECB President Mario Draghi, who succeeded Jean-Claude Trichet in November, offered unlimited three-year cash at 1 percent last month to persuade banks to keep providing credit to the region. The injection helped bring down borrowing costs for Italy, Spain and Belgium.
“We would regard the recent stability in Europe as a mirage and we expect growth to severely underperform even the most bearish expectations as a combination of deleveraging, austerity, huge confidence shock and tight financial conditions all wreak havoc on the economy,” Richard Franulovich, a senior currency strategist at Westpac Banking in New York, said in a Jan. 4 telephone interview.
The European Commission cut its 2012 growth forecast by more than half to 0.5 percent in November. The median estimate of 15 economists surveyed by Bloomberg News is for the region’s economy to contract by 0.1 percent in each of the first two quarters this year, while a separate survey shows the U.S expanding 1.9 percent and 2.05 percent.
Margin of Error
Even with a euro forecast that bounced from $1.37 to $1.24 in 2011, Bennenbroek and Wells Fargo senior strategist Vassili Serebriakov’s core case of superior U.S. growth gained them the best overall margin of error of 3.98 percent across 13 currency pairs in the six quarters ended Dec. 31.
That was the lowest since the survey began in the second quarter of 2010, even though they didn’t place among the top five most accurate euro strategists.
Westpac, the fourth most-accurate euro-dollar forecaster, expects the shared currency to weaken through December as the ECB lowers interest rates from 1 percent to about zero and the possibility of Greece exiting the euro resurfaces.
“It’s a cataclysmic scenario for Europe and an environment where the euro trades very badly,” Franulovich said.
The ECB meets Jan. 12 and is predicted to leave rates unchanged after two consecutive reductions, according to the median estimate of 34 economists in a Bloomberg News survey.
JPMorgan Chase & Co. and Oversea-Chinese Banking Corp., the next two most-accurate, see the euro rebounding by June as the ECB keeps the debt crisis from worsening. National Australia Bank Ltd., which rounds out the top five, expects no change.
The ECB will step up purchases of bonds from nations whose borrowing costs are rising to unsustainable levels as governments institute fiscal reforms, according to John Normand, the London-based global head of currency strategy at JPMorgan.
“The ECB will not make a bargain explicit, but I suspect they will increase debt purchases if reform legislation is implemented,” Normand said in a Jan. 5 telephone interview. Coupled with lower interest rates, “the euro should stabilize, then rebound,” said Normand, who expects the euro to gain to $1.34 by the end of the second quarter.
Italy, Spain Austerity
Mario Monti, the former EU commissioner who became Italy’s prime minister in November, spent his first month in office enacting 30 billion euros ($38 billion) in austerity and growth measures aimed at taming the world’s third-largest debt load.
Spanish Prime Minister Mariano Rajoy, whose party ousted the Socialist Party in November’s elections, announced 14.9 billion euros of spending cuts and tax increases on Dec. 3. Greek Prime Minister Lucas Papademos, committed his government to reform and said last week that cuts in income are the only way to stay in the euro.
JPMorgan, based in New York, slipped to third place in the rankings from first last quarter as an expanding U.S. economy damped speculation that the Federal Reserve would further ease monetary policy, hurting the dollar.
Housing, consumer confidence and manufacturing data exceeded analysts’ estimates in the final months of 2011. The economy added 200,000 jobs in December, reducing the unemployment rate to 8.5 percent, the lowest level since February 2009, the Labor Department said Jan. 6.
European leaders’ Dec. 9 pledge to form a fiscal union, “and getting over the first-quarter hump of refinancing by several of the euro-zone countries may give some room for a return of risk appetite, which explains the profile we have for euro-dollar to stabilize into the middle of this year,” Emmanuel Ng, a currency strategist at Oversea-Chinese Banking in Singapore, said Jan. 5 in a telephone interview.
‘Looser Monetary Policy’
Oversea-Chinese Banking was the fourth-most accurate forecaster for the second consecutive quarter and had the second-lowest margin of error on the euro versus the dollar. It expects the euro strengthen to $1.35 by year end.
“The differential between the economic performance of the U.S. and Europe will contribute to some negativity on the European currency,” Rob Henderson, chief economist for markets at fifth-ranked National Australia Bank, said by phone from Sydney on Jan. 5. “We also expect that the ECB will in one way or another be running looser monetary policy whereas the Fed is pretty comfortable at the moment with keeping policy where it is, so that’s another negative for the Europeans.”
National Australian forecasts the euro ending the current quarter at $1.25.
Strategists were ranked according to the accuracy of their estimates for 13 currency pairs in each of six quarters beginning with the three months ended Dec. 31. To test long-term accuracy, Bloomberg News added one annual forecast, which was made in December 2010 for December 2011.
Only firms with at least four forecasts for a particular currency pair were ranked, and only those that qualified in at least eight of 13 pairs were included in the ranking of best overall predictors. Thirty-six firms qualified.
© Copyright 2014 Bloomberg News. All rights reserved.