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Euro Weakness Wanes as Traders Drop Bear Views on Draghi

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Source: Bloomberg

The world’s biggest banks are less pessimistic about the euro as the European Central Bank provides unlimited cash to the region’s financial system, Germany may avoid recession and Greece looks to complete the biggest sovereign debt restructuring in history.

Strategists at Bank of America Corp and Morgan Stanley raised their estimates for the euro this month, as the median estimates of more than 50 strategists surveyed by Bloomberg increased for the second and third quarters. The 17-nation currency is up about 1.3 per cent from an almost 10-year low on January 16 against nine developed-market peers.

While the crisis that led to bailouts of Greece, Portugal and Ireland and the restructuring of Greek debt caused the euro to weaken 8.7 per cent versus the dollar since August, traders who predicted a breakup of the single currency are being silenced. ECB President Mario Draghi gave banks more than EUR1 trillion (US$1.31 trillion) of three-year loans in December and February, and German business confidence rose to a seven-month high.

“We’ve been gradually feeling better about Europe,” David Woo, the global head of rates and currencies at Bank of America Merrill Lynch in New York, said in a telephone interview on March 2. Draghi’s loans have supported the euro, he said. “That combined with the fact that the global economic outlook has improved, including US growth gaining momentum, has made us less bearish on the euro.”

Bank of America increased its June 30 call to US$1.30 from US$1.25, according to a February 29 note.

The euro depreciated 0.6 per cent last week to US$1.3123 and is 8.8 per cent higher than the average of about US$1.2067 since its inception in January 1999. It strengthened 0.2 per cent to JPY108.22, taking its year-to-date advance to 8.6 per cent against Japan’s currency.

The euro was little changed Monday at US$1.3110 at 8:14 am London time. It fell 0.5 per cent to JPY107.69.

Draghi cut the ECB’s benchmark interest rate twice, to 1 per cent, and expanded the central bank’s balance sheet to more than EUR3 trillion since assuming office November 1, reversing the strategy of predecessor Jean-Claude Trichet, who oversaw 0.25 percentage-point rate increases in April and July.

Strategists at Morgan Stanley said March 2 they expect the euro to trade at US$1.34 at the end of the quarter, up from a US$1.27-forecast a month earlier.

“We now believe the ECB will not be quite as aggressive with its policy response and we are not likely to see as deep rate cuts as we were expecting before,” Ian Stannard, head of European foreign-exchange strategy at the bank in London, said in a telephone interview on March 6. “It looks as if the need for the ECB to take further measures has been reduced and that should allow the euro’s decline to unfold at a slower pace.”

Morgan Stanley now expects a 25 basis-point rate cut this year, coming in the second quarter, compared with a prior forecast for a 50 basis-point reduction in 2012. The firm predicts the euro will slide to US$1.19 by year-end.