The euro will weaken against the dollar in the long term once the U.S. recovery strengthens enough for the Federal Reserve to stop pumping money into the economy, Honeywell International Inc. (HON:US) predicted.
“It’s more likely to trend down than it’s going to strengthen” since reducing Fed stimulus would raise interest rates and boost demand for the dollar, Chief Financial Officer Dave Anderson said in a telephone interview today. “That’s consistent with what we consider to be macro influences.”
Honeywell has kept its 2013 euro forecast at $1.25, even though the currency has traded at about $1.30 for the past two weeks, up from this year’s low of $1.2746 in late March. The Morris Township, New Jersey-based manufacturer draws about a quarter of sales from Europe, and a weaker exchange rate lowers their value on income statements.
A stimulus reduction by the Fed is unlikely in the near future because government budget cuts and higher taxes are dragging down U.S. growth by about 1 percentage point, Anderson said.
“Those are pulling the economy one way and then the Fed stimulus is really helping to offset that and push it more positively the other way,” he said. “At some point that’s going to come into alignment and we’re going to see some easing of stimulus by the Fed.”
Several U.S. policy makers, including Federal Reserve Bank of New York President William C. Dudley, have said the Fed should maintain record monetary stimulus after an April 5 report showed employers added 88,000 workers in March, the smallest gain in nine months.
The Federal Open Market Committee said in March that it will continue buying $85 billion in bonds each month until the labor market “improves substantially.”
The panel also repeated its pledge to keep the main interest rate near zero so long as the unemployment rate remains above 6.5 percent and the forecast for inflation doesn’t exceed 2.5 percent over one to two years.
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