Euro rally is over, say FX forecasters, as dollar gears up

LONDON Wed Apr 2, 2014 12:04pm EDT

Euro and U.S. dollar banknotes are seen in this picture illustration taken in Prague January 23, 2013. REUTERS/David W Cerny

Euro and U.S. dollar banknotes are seen in this picture illustration taken in Prague January 23, 2013.

Credit: Reuters/David W Cerny

LONDON (Reuters) - The euro's recent rally is over as desperately low inflation and tepid economic growth will force the European Central Bank to keep monetary policy loose or possibly drive it to ease even further, according to a Reuters poll of forecasters.

Taken this week, the poll of over 60 foreign exchange strategists predicted a euro would be worth $1.37 in one month, $1.33 in six and just $1.29 in a year. Those forecasts are slightly stronger than in a poll taken a month ago.

More than half of strategists who answered an extra question said the dollar would be the most favored developed market currency this year.

The euro was 2013's best performing currency, baffling many that had expected a weak euro zone economy and a reduction in Federal Reserve bond-buying to strengthen the dollar instead.

"The euro has frustrated its would-be sellers. This time, the culprits have been uncooperative weather in North America that stalled (and partially reversed) the rise in U.S. rates and the ECB's inability or unwillingness to address worryingly low euro area inflation," said Marvin Barth at Barclays.

"We expect these to be temporary inhibitors of euro weakness."

Euro zone inflation fell to 0.5 percent last month, its lowest since November 2009 and well below the ECB's target of just below 2 percent. The economy is only expected to grow 0.3 percent for most of the coming quarters.

Still, the ECB is not likely to do anything when it meets on Thursday or indeed through to at least the middle of next year. But a significant minority of economists polled by Reuters said the bank should do more to help.

That is in contrast to the U.S. Fed which has been winding down its massive stimulus programme, and the Bank of England, which is widely touted as likely to be the first of the big four central banks to raise interest rates.

Over the past year the common currency, trading around $1.38 on Tuesday, has gained over 8 percent on the greenback as rhetoric from ECB President Mario Draghi has papered over the lack of any actual action from the central bank.

Currency speculators increased bets in favor of the euro to the highest since October, according to data from the Commodity Futures Trading Commission on Friday.

"One key element that is justifying the euro strength so far is that Draghi has said he will do whatever it takes to save the euro and it will be enough - that changed the expectations completely," said Roberto Mialich at UniCredit.

Mialich, who was the most accurate forecaster in Reuters currency polls last year, is one of the few who don't think the euro's rally is over.

"Our view is that the underlying strength of the euro zone and the British recovery is on course. It's not just the matter that the dollar will fall but the fact is that these two areas are recovering, but at different speeds."

STERLING OUTLOOK

With the BoE expected to raise borrowing costs from their record low in the second quarter of next year the euro will also suffer against sterling.

One euro will get you 82.7 pence in a month, 81.2p in six and just 79.5p in a year's time, according to the poll, little changed from a month ago.

One pound will be worth $1.66 in a month and $1.64 this time next year - slightly more than in last month's poll and compared to the $1.66 it was trading at on Wednesday.

The safe-haven yen will probably struggle this year, with median forecasts suggesting you will need 103 to buy one dollar in a month, 106 in a six months and 110 in a year.

The Japanese currency is expected to suffer as persistently low inflation and a weak economic outlook - hurt by a sales tax rise this month - is likely to force the Bank of Japan to ramp up its own stimulus just as the Fed winds its down.

(Analysis by Ashrith Doddi and Hari Kishan, polling by Sarbani Haldar and Siddharth Iyer; Editing by Toby Chopra)

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