LONDON (Reuters) - Goldman Sachs, one of the most bearish investment banks on the outlook for the euro, ditched its call on Friday for the single currency to fall below $1.00 EUR= next year, predicting it will now trough at $1.05.
The bank recently lowered its outlook for U.S. interest rates and Treasury bond yields, which implies a slower rate of appreciation in the dollar in the coming months.
Deutsche Bank, another of the most aggressive euro bears in the investment banking community, has also raised its euro forecasts, although it still expects the euro to fall below parity with the dollar in 2017.
“We delay some of our expectation for euro downside well into next year, given mixed messages from the European Central Bank,” Goldman’s currency strategy team led by Robin Brooks said in a note on Friday.
“Overall, our view remains that the dollar will rise a further 13 percent, but that appreciation is tilted against the yen near term and more back-loaded elsewhere,” they said.
Brooks and his team now see the euro falling as low as $1.05 next year compared with their previous forecast of $0.95. They still expect $0.90 will be reached over the next three years.
Shorter-term, they now see the euro at $1.12 in three months and $1.10 in six months, compared with their previous calls for $1.04 and $1.00, respectively.
They also lowered their dollar/yen JPY= forecasts to 115 yen in three months, 120 yen in six months and 125 yen in 12 months, from 122 yen, 125 yen and 130 yen previously.
“Ultimately, we have more faith that the Bank of Japan will find ways to surprise on the dovish side, given that reflation is at the core of Abenomics. As a result, we continue to forecast substantial dollar/yen upside,” they wrote.
Both the ECB and BOJ are pumping large amounts of stimulus into the financial system via their respective bond purchase programs. Yet the euro and yen have appreciated substantially against the dollar this year, the euro by 4 percent and the yen by almost 10 percent.
In recent days Goldman lowered its U.S. 10-year yield forecast to 2.40 percent this year from 2.75 percent, and to 2.75 percent next year from 3.30 percent. On Friday it was trading around 1.74 percent US10YT=RR.
Last week Goldman’s economists cut their expectation for cumulative U.S. rate hikes over the next 18 months by 50 basis points.
Reporting by Jamie McGeever; Editing by Hugh Lawson
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