June 17 (Bloomberg) -- The euro will rebound even as concern mounts that the Greek debt crisis will worsen, analysts at JPMorgan Chase & Co. and Nomura Holdings Inc. predict.
The 17-nation currency may outperform the dollar and yen this year even if the region’s policy makers put off agreeing on a resolution to the debt crisis as long as it happens “in a stable manner,” said Tohru Sasaki, Tokyo-based head of Japan rates and foreign-exchange research at JPMorgan.
European Central Bank authorities, including President Jean-Claude Trichet, have pushed back against German plans to lengthen the maturity of Greek bonds, leaving open only the option to persuade bondholders to voluntarily reinvest the proceeds of maturing debt into new securities. A Greek default would hobble the ability of the nation’s institutions to tap the ECB for emergency funds and weaken the fabric of the 53-year-old European Union and its 12-year-old single currency.
“The market will calm down as long as policy makers don’t come up with a drastic decision next week, like something that urges private investors to share Greece’s debt burden,” Sasaki said at a Bloomberg seminar in Tokyo yesterday. “The broad weakness of the dollar and yen will remain in the face of resilient growth worldwide. I personally think the euro could reach 120 yen this year.”
The euro traded at $1.4200 as of 10:36 a.m. in Tokyo from $1.4204 in New York yesterday, when it reached $1.4074, the weakest level since May 26. The currency was at 114.52 yen from 114.56 yen.
Outperformed Dollar, Yen
The shared currency headed for a second weekly decline, having fallen 1 percent. It has gained 1.3 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar has weakened 6.7 percent, while the yen is down 2.4 percent over the same period.
JPMorgan forecasts the euro will rise to $1.48 and 115 yen by year-end, compared with median projections for $1.40 and 122 yen by economists and analysts in a Bloomberg survey.
The downward pressure on the euro is unlikely to persist because market expectations are still for further interest-rate increases by the central bank, according to Taisuke Tanaka, Tokyo-based chief currency strategist at Nomura.
“The recent decline in the euro is attributable to a surge in fiscal premium in the countries in the region,” Tanaka said at the seminar. “The euro may be supported once the market’s attention returns to rate expectations by the ECB. I don’t think there’s any chance the euro will fall into a bearish trend.”
The cost of protecting Greece against default climbed 458 basis points to a record high of 2,236 basis points yesterday, prices compiled by CMA show.
Swap traders are betting the ECB will increase interest rates by 38.2 basis points over the next 12 months, a Credit Suisse AG index showed. The central bank raised borrowing costs in April for the first time in almost three years, bringing the main refinancing rate to 1.25 percent.
The common currency will trade at $1.45 and 127 yen at the end of this year, according to Nomura.
--Editors: Jonathan Annells, Naoto Hosoda
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