(Updates with comments from Nomura in sixth paragraph, S&P in eighth.)
Dec. 6 (Bloomberg) -- Nomura International Plc cut its forecast for the euro to $1.20, citing the risk that Italy will default next year if the European Central Bank fails to step up support for the country.
Foreign investors will keep selling their euro assets if the ECB doesn’t step in as a lender of last resort, Nomura strategists including Jens Nordvig in New York, wrote in a note to clients dated yesterday. Nomura previously predicted the euro would trade at $1.32 by the middle of next year.
“The ECB will be forced to either commit to full-blown quantitative easing to save the euro by ring-fencing Italy; or face an Italian default in 2012,” the analysts wrote. “This scenario would involve a high risk of euro-zone break-up.”
The euro declined 0.1 percent to $1.3389 at 5:05 p.m. London time, having weakened 4.4 percent in the previous three months. The currency last traded at $1.20 in June 2010.
The ECB may have to follow in the footsteps of the Federal Reserve and the Bank of England by buying bonds without sterilizing them, so-called quantitative easing, in order to spur economic growth, the Nomura strategists wrote.
“At some point, we may also see capital flight out of the euro zone by euro-zone investors,” they wrote. “This is a scenario of dramatic leveraging, and could see large FX moves.”
French and Spanish bonds fell today after Standard & Poor’s said it may cut credit ratings of 15 euro nations, including France and Germany, and the European bailout fund.
The ECB is “somewhat hesitant to engage in full-throttle” quantitative easing and leaders will have to come up with a “credible” crisis response, Moritz Kraemer, S&P’s managing director for European sovereign ratings, said on a conference call from Frankfurt.
--Editors: Nicholas Reynolds
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