Euro may fall below $1.30 by Q4: Report

24/05/2015 10:30 AST

The sliding euro could fall below parity with the United States dollar by the fourth quarter - the first time this would have happened since December 2002.

In making the forecast, Bank of Tokyo-Mitsubishi UFJ (BTMU) estimated that the euro would hit parity with the greenback by the third quarter before declining to 98 US cents(S$1.30) and then to 96 US cents by early next year.

The bank also predicted that the euro, which was worth S$1.4887 late last Friday, would fall against the Singapore dollar. BTMU tipped it would decline to S$1.45 by the end of the third quarter and then to S$1.40 by the end of the year.

The predictions come despite the euro's 4.3 per cent jump against the greenback last month, the largest one-month percentage gain since April 2011. It took the currency from US$1.0738 to US$1.1194.

BTMU said this increase was partly due to a reversal in the strength of the US dollar after disappointing growth numbers in the first quarter. Gross domestic product grew by just 0.2 per cent, well down from the 2.2 per cent expansion posted in the fourth quarter last year.

BTMU expects the greenback to recover as this "transitory" weakness had been caused by temporary factors such as weather, port strikes on the west coast and a plunge in mining sector investment due to the oil price crash.

The bank said the appreciation of the euro against the US dollar had also been caused by what it called a recent "reversal" of the effects of the European Central Bank's (ECB) quantitative easing (QE) programme.

The resurgence of bond yields in the euro zone prompted investors to buy more euros, which in turn sent the currency's value up against the US dollar.

But Mr Derek Halpenny, BTMU's European head of global market research covering Europe, the Middle East and Africa, said the rise in yields was "unlikely to prove sustainable over the near term".

He pointed out that the QE programme was only in its early stages and was unlikely to be called off. This means QE will likely remain a "dampener" on bond yields so the euro's rebound will be "temporary".

He cited the remarks of ECB executive board member Benoit Coeure, who said last week that the bank could even accelerate the programme by buying more bonds this month and next. He said that if this move stabilised the bond market, it would end the reversal of QE and return markets to the position he described as "long bond, long equity and short currency".

This would push the euro lower, he said.

Mr Halpenny said business confidence in the euro zone had increased because of QE as well as the fall in oil prices and easing worries over Russia.

But this may not strengthen the euro and could even fuel further capital flight, as investors' appetites for risk grow and they leave for higher-yield investments elsewhere, he added.

He suggested that potential sellers have been holding on to the euro amid the uncertainty surrounding Greece, but "renewed selling" would occur "once there is some clarity". He said he did not think Greece would exit the euro zone but added that a boost to the euro from a successful deal "would not last".

Straits Times