Expected euro weakness clipped on more Fed QE

The euro's expected retreat versus the dollar over the next year will be more modest than thought a month ago, a Reuters poll showed, as the US Federal Reserve may be about to embark on more asset purchases. The survey of around 60 foreign exchange strategists showed the euro would weaken from its current level around $1.385 to a median $1.30 in a year's time - a seven cent upgrade from the $1.23 seen in September's poll.
Analysts bumped up their median forecasts for all of the one-, three-, six- and 12-month timeframes for just the second time this year, after no-one last month came close to predicting the extent of the euro's rise in September. The dollar hit an 8-1/2 month low against a basket of currencies on Wednesday, hurt by expectations that the Federal Reserve will resume quantitative easing - dubbed QE2 - to spur US economic growth, possibly at its November meeting.
"Speculation that the Fed may start QE2 as early as in November should keep the greenback under siege for now, although this event is now quite priced in by markets," said Roberto Mialich of UniCredit.
He said a correction is likely by the end of the year, when investors are expected to focus again on the problems of sovereign eurozone debt.
More QE, through which the Fed would buy mortgage-related and Treasury bonds to inject fresh funds into the economy, would be negative for the greenback because the purchases would entail vast sums of newly-created dollars. Fed Chairman Ben Bernanke said on Monday that the previous round of QE had helped ease credit conditions, adding that further asset purchases could help further.
Despite the prospect of QE in the United States, analysts said the euro would not return to an ascendant long-term trend any time soon while fears about the poor fiscal state of many eurozone countries persist.
Ireland on Thursday revealed the spiralling cost of its banking sector bailout as its government prepares more painful austerity measures, while Spain lost its remaining top-notch "AAA" credit grade from Moody's ratings agency.
"The outlook in the eurozone is very uneven and with a dire outlook in several countries," said Niels Christensen of Nordea, adding that this should eventually bring the euro lower. Analysts expected the euro to weaken to around $1.36 in a month's time, $1.35 in three, and $1.32 in six months - still a sizeable upgrade from the respective forecasts of $1.26, $1.25 and $1.24 from Septemeber's poll.