London: The most accurate foreign-exchange strategists say the euro's worst annual performance since 2005 will extend into next year as the region's sovereign-debt crisis saps economic growth.
Standard Chartered Plc, the top overall forecaster in the six quarters ended September 30 based on data compiled by Bloomberg predicted the euro may weaken to less than $1.20 (Dh4.40) by mid-2011 from $1.3352 yesterday. Westpac Banking Corp, the second most accurate, is "bearish in the short term," and No 3 Wells Fargo and Co cut its outlook at the end of last week.
The 16-nation currency's first weekly gain against the dollar since November 5 may prove short-lived amid mounting concern that more nations will need rescues. European Central Bank President Jean-Claude Trichet delayed the end of emergency stimulus measures last week and stepped up government-debt purchases as "acute" market tensions drove yields on Spanish and Italian bonds to the highest levels relative to German bunds since the euro started in 1999.
"We're going to get a continuation of the problems that Ireland, Portugal, Spain and others are suffering," said Callum Henderson, Standard Chartered's global head of foreign-exchange research in Singapore. "The fundamental issue is these are countries that have relatively large debts, large budget deficits, large current-account deficits, they don't have their own currency and they can't cut interest rates. The only way they can get out of this is to have significant recessions."
Sentiment reverses
Ireland's budget deficit will rise to more than 32 per cent of gross domestic product this year, including the cost of bailing out the nation's banks, European Commission data from last Wednesday showed. Spain's deficit will be 9.3 per cent in 2010. Portugal's total debt will reach almost 83 per cent of GDP this year from about 76 per cent in 2009, according to the commission.
Just a month ago the euro reached $1.4282, the strongest level since January, as traders sold the dollar on speculation the Federal Reserve would debase the greenback by printing more cash to purchase $600 billion of Treasuries in so-called quantitative easing.
Now, those concerns are being overshadowed by the possibility that Europe's economy slows next year as governments impose austerity measures to reduce budget deficits, while officials drive bond investors away with talk of forcing them to take losses as part of future bailouts.
Demand for options granting the right to sell the euro over the next three months relative to those allowing for purchases reached the highest level since June last week.
Outlook
European banks paid the biggest premium to borrow in dollars through the swaps market since May last week, a signal the outlook for the euro may deteriorate. The price of two-year cross-currency basis swaps between euros and dollars reached minus 51.8 basis points on December 1, from minus 20.9 on November 4.
"We have a lot of time to go" before the situation in Europe is resolved, John Taylor chairman of FX Concepts LLC, the world's biggest currency hedge fund, said Thursday at the Hedge Funds New York Conference hosted by Bloomberg Link. "That means the market is going to be twitching."
