Bloomberg News

Euro Seen Bowing to Dollar as ECB Gives Way to Fed Growth-Boost

October 16, 2012

European Central Bank President Mario Draghi’s pledge to backstop the euro is giving the currency a boost that will fade as U.S. growth outpaces Europe, delegates said at the Bloomberg Link FX12 Summit in London.

“There is potential to see another euro leg higher but after that has been played out the fundamentals should come more into the forefront,” said Thomas Kressin, senior vice-president and head of European foreign exchange at Pacific Investment Management Co.

The euro has risen 6.2 percent against the dollar since Draghi said in a July 26 speech that policy makers would do “whatever it takes” to save the currency bloc. That may include government-bond purchases, he said on Sept. 6. The currency dropped to the low for the year of $1.2043 on July 24, versus its five-year average level of $1.38. It was at $1.3049 at 6:23 p.m. London time.

“Even if you remove all of the tail-risk, Europe will be a very weak economy for an extended period and there’s just nothing more you can do about it,” Steven Englander, head of Group-of-10 foreign-exchange strategy at Citigroup Inc. in New York, said at the conference.

‘Sustained Improvement’

While Draghi attempts to restore confidence in the euro area, Federal Reserve Chairman Ben S. Bernanke is undertaking measures to boost U.S. growth. He said on Sept. 13 that the central bank will conduct a third round of so-called quantitative easing, buying $40 billion of mortgage debt a month until policy makers see “ongoing, sustained improvement in the labor market.”

A report yesterday showed U.S. retail sales climbed 1.1 percent in September, exceeding the median forecast of 77 economists surveyed by Bloomberg, which called for a 0.8 percent increase. The unemployment rate fell to 7.8 percent last month, the lowest level since January 2009.

The dollar will remain the global reserve currency in the absence of the euro as a contender for the role, according to Antulio Bomfim, senior managing director at St. Louis-based Macroeconomic Advisers.

“If you had asked me this question a few years back, I probably would have to stop and think that maybe the dollar would be sharing the stage with the euro,” said Bomfim. “It will still be the dollar.”

Currency Debasement

Alan Ruskin, New York-based global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG, agreed.

The euro “could have challenged it but given some of the problems” in the region, that is no longer a possibility, he said. “The dollar will lose a bit of ground” as the Fed expands its balance sheet, he said.

The Fed’s pursuit of asset purchases risks debasing the currency as the euro region pulls out of its debt crisis, according to James Rickards, senior managing director of Tangent Capital Partners in New York.

“The strongest currency in the world, the one that is going to do the best, is the euro,” he said. “They are doing just about everything right. The U.S. is going to get a cheaper dollar. The euro will get a lot stronger and it could trade above $1.40.”

‘So Bearish’

The euro is more likely to strengthen in the near term as so many investors have a negative view on the currency, according to Goldman Sachs Asset Management Chairman Jim O’Neill.

“Everyone’s so bearish about the damn thing it’s not hard for it to go up,” O’Neill said in a discussion with Tom Keene. “All you need is a period of no bad news.”

Spain has yet to request a bailout that would enable the ECB to buy its bonds, easing the financial-market turmoil, and Greece is seeking to agree with creditors on terms that will allow the next tranche of its bailout funding to be distributed. European Union leaders are scheduled to gather for a summit in Brussels on Oct. 18-19.

Analysts estimate the euro-region economy will contract 0.5 percent this year and grow 0.3 percent in 2013, according to estimates compiled by Bloomberg. That compares with forecasts for U.S. growth of 2.1 percent this year and 2 percent the year after.

“We have severe reservations about the way it plays out in Europe and we are more optimistic about the U.S. in the ugly dog competition,” said Frances Hudson, a global strategist at Standard Life Investments in Edinburgh.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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