Bloomberg News

FX Concepts’ Taylor Says Euro May Drop to Parity With Dollar

December 16, 2011

(Adds Taylor comments beginning in second paragraph.)

Dec. 15 (Bloomberg) -- The euro will sink to parity against the dollar as the European sovereign-debt crisis shrinks investor appetite for the 17-nation currency, according to John Taylor, founder of the world’s largest currency hedge fund.

“It should be a lot lower than it is,” Taylor said in an interview on Bloomberg Television’s “Street Smart” with Lisa Murphy. “It’s a distinct possibility” that the euro could weaken to trade on a one-to-one basis with its U.S. counterpart in the next 18 months, he said.

Taylor predicted in January that the euro would fall below parity with the dollar this year. The shared currency has dropped 2.7 percent this year as the region’s leaders bailed out Portugal after providing rescue packages in 2010 for Ireland and Greece and attempted to rein in rising sovereign debt yields.

The euro gained 0.3 percent to $1.3014 at 5 p.m. in New York. The currency is trading 8 percent higher against the dollar than its average value of $1.2042 since inception in 1999.

Taylor, who said he owns more dollars than anything else, cited European investors repatriating foreign assets as the main driver of the euro’s relative strength this year. European portfolio managers brought home 65.9 billion euros ($85.8 billion) in August and 11.6 billion euros in September, higher than the 12-month average of 629 million euros in inflows, according to European Central Bank data compiled by Bloomberg.

Capital Flows

Repatriation is occurring as banks rush to increase capital to meet a European Banking Authority mandate that lenders increase their Core Tier 1 capital ratios to more than 9 percent by mid-2012, Taylor said.

European leaders unveiled a blueprint last week for a closer fiscal accord to save the currency, adding 200 billion euros to their current bailout fund and tightening rules to curb future debts. They also agreed to move up the creation of its permanent bailout fund.

The European Central Bank has bought 207.5 billion euros of sovereign bonds since May 2010 to curb a rise in borrowing costs. Yields on Italian 10-year bonds reached a euro-era record of 7.48 percent in November as concern increased the nation wouldn’t be able to pay its debt.

Taylor, who manages about $5.5 billion from New York, said Norway’s krone and Sweden’s krona are the most attractive European currencies.

The krone “is one of the best currencies there because they have all the oil and they don’t even belong to the European Union,” Taylor said. “They’re completely free so they can do whatever they want and what they want is generally a strong currency, a stable currency.”

While he also favors the Canadian and Australian dollars, he said he has a short position, or a bet that the price will decrease, on the New Zealand dollar. Both Australia and New Zealand are at risk if a slowdown in China’s economy spurs a drop in commodity prices.

--Editors: Dave Liedtka, Paul Cox

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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