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Top Forecasters See Euro Weakness Returning on Spain

The most-accurate foreign-exchange forecasters say the euro will slide as austerity-driven spending cuts from Spain to Italy reignite debt turmoil and drag the region into recession.

Nick Bennenbroek, head of currency strategy at Wells Fargo & Co., who topped the list for the fourth time out of the past six quarters according to data compiled by Bloomberg, expects the euro to drop more than 5 percent to $1.24 at the end of 2012. Westpac Banking Corp., which had the second-lowest margin of error, predicts $1.26.

The euro’s biggest quarterly gain in a year will prove fleeting. The economy faces “downside risks” amid rising Spanish and Italian borrowing costs, European Central Bank President Mario Draghi said on April 4. The benefits of record ECB loans to local banks, which helped drive yields down from euro-era records, are fading and the region faces recession, while the U.S. expands at the fastest pace in two years.

“One of the reasons the euro gained was that we saw some progress in the European debt crisis and some improvement in European bond markets, and we’re near the end of that,” Bennenbroek said in a telephone interview in New York on April 2. “The euro will weaken further as slow to no growth weighs on sentiment and as ECB actions continue to weigh.”

The euro weakened 0.3 percent to $1.3064 at 11:11 a.m. London time, and slid 0.7 percent to 106.10 yen. The dollar fetched 81.19 yen from 81.49 yesterday.

First Quarter Gain
The 17-nation currency strengthened 2.95 percent in the first quarter as the European Union arranged a second bailout package for Greece after the nation negotiated a debt-swap with its private-sector investors, and as the ECB provided a record amount of loans to the region’s banks. The actions reduced investor concern that the crisis would spread.

Austerity measures across the region are driving the economy into a recession, spurring concern the ECB may introduce further easing measures, according to Richard Franulovich, a senior currency strategist at Westpac in New York.

“Europe’s going through deleveraging, austerity, and growth is very poor,” he said in an April 3 telephone interview. “So you have a situation where the ECB could be easing and the Fed is basically on hold, and that should mean interest-rate differentials move in the dollar’s favor.”

Rise to Resume
The next three most-accurate forecasters see euro gains continuing. Jane Foley, a London-based senior currency strategist at Rabobank International and the fifth-most accurate, said the euro may rise as the Federal Reserve keeps interest rates at a record low and the U.S. moves to cut its budget deficit after presidential elections in November.

Employers in the U.S. added 120,000 jobs in March, the fewest in five months, Labor Department figures showed on April 6 in Washington. The March increase was less than the most pessimistic forecast in a Bloomberg News survey, in which the median estimate called for a 205,000 gain. Unemployment declined to 8.2 percent, the lowest since January 2009, from 8.3 percent.

“The labor market recovery is still slow and the unemployment levels very high,” Foley said in a telephone interview on April 3. “If there is any degree of fiscal cleanup after the election, then that will be a drag on growth and monetary policy will have to remain accommodative for longer.” The euro will probably trade at $1.35 in nine months and climb to $1.40 a year from now, she said.

JPMorgan Chase & Co. and Oversea-Chinese Banking Corp., the third and fourth most-accurate forecasters, predict the euro will appreciate to $1.36 and $1.35, respectively, by year end.

Euro Support
“We will not be explicitly expecting another meltdown” for the euro, Emmanuel Ng, a currency strategist at OCBC in Singapore, said by telephone yesterday. “We still expect risk for the euro to be on the downside.” Ng said he predicts the euro will be at $1.30 at the end of June.

Europe’s common currency will remain supported as Spain and Italy are unlikely to require financial aid and the U.S. isn’t growing fast enough for the Fed to start raising interest rates, according to John Normand, head of currency strategy at JPMorgan, the biggest U.S. lender.

“There are enough mechanisms to allow countries like Spain and Italy to retain market access even if they may have to roll over debt at higher interest rates for a period,” London-based Normand said in a telephone interview April 5. “It’s difficult to look at the balance of data emerging from the U.S. and conclude that the Fed will prepare the ground for rate hikes.”