Euro to hold gains over December, but fall next year: Reuters poll

LONDON Wed Dec 5, 2012 9:54am EST

Euro banknotes and small coins are pictured in open cash register in a shop in Olching August 16, 2011. REUTERS/Michaela Rehle

Euro banknotes and small coins are pictured in open cash register in a shop in Olching August 16, 2011.

Credit: Reuters/Michaela Rehle

LONDON (Reuters) - The euro will probably hold its value against the dollar over the next month after rallying over the last few weeks, but a persistently weak euro zone economy will put it under pressure next year, a Reuters poll showed.

The euro hit a seven-week high of $1.3127 against the dollar on Wednesday, boosted by efforts to tackle the debt problems of Greece and Spain, while the dollar came under pressure from expectations of new bond-buying from the U.S. Federal Reserve.

With U.S. politicians engaged in fraught negotiations to avoid a severe budget tightening at the start of the new year that could stamp out economic growth, the euro should hold onto its gains over the next month.

But the fundamentals of the euro zone economy remain very poor, with several of its major countries locked in recession. <EUR/PMIS>

Economists expect little more than stagnation next year, with the potential remaining for the region's sovereign debt crisis could again flare up. <ECILT/EU>

While the poll of more than 60 analysts showed the euro still at around $1.30 at end-December, it will then sag to $1.28 in three months, $1.27 in six months and $1.25 in 12 months - little changed from last month's poll.

"We remain fearful around the euro area sovereign crisis into 2013," said Paul Robson, head of European FX strategy at RBS Global Banking & Markets.

He said the European Central Bank's policy response has temporarily stabilized financial markets and given peripheral euro zone countries more time for a recovery plan, but it hasn't so far tackled the underlying problems of the crisis.

"We believe that countries will struggle to deliver on their promised deficit reduction plans in 2013. Higher periphery yields and tensions, and renewed capital flight are expected to weigh on the euro in 2013."

Still, the one-month euro/dollar outlook for $1.30 is the strongest in seven monthly foreign exchange polls.

Currency speculators' sentiment towards the euro has improved since the beginning of the year, when net short positions for the euro were a record high, and they cut their bets in favor of the U.S. dollar in the latest week.

The U.S. faces a forced $600 billion of budget tightening in spending cuts and tax hikes if politicians cannot strike a deal on how to slim the budget by the end of the year, a deadline dubbed the "fiscal cliff".

"We assume that there will be a firming of the euro against the dollar as December progresses due to mounting concern over the U.S. fiscal cliff," said Howard Archer, chief UK and European economist at IHS Global Insight.

He thinks an agreement on the fiscal cliff will be reached either just before the end of December, or shortly after, limiting the dollar's weakness.

"However, there are significant downside risks to the dollar should a lack of progress be made on the fiscal cliff," he added.

Against sterling, the poll showed the euro hanging around the 80 to 81 pence mark over the next year. <GBP/POLL>

(Polling and analysis by Snehasish Das; editing by Stephen Nisbet)

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