The euro is expected to hold firm against the dollar through the year-end and probably will still trade near $1.50 well into 2010, according to the collective wisdom of the world's top foreign exchange strategists. The latest Reuters monthly poll of 61 strategists, taken this week, found 39 of 61 predicting the euro at $1.50 or higher in three months, compared with 33 of 69 in the November poll.
Forty-two of them predicted the euro above its recent 16-month high of $1.5145 at some point in the forecast horizon, with the highest forecast polled at $1.65 in six months. "Pro-risk strategies, ie, higher equities, commodities, central bank liquidity and a shrinking US labour market favour further upside in EUR/USD in the near term," said Kenneth Broux at Lloyds TSB Corporate Markets.
But most say that scenario probably won't last, particularly given that the recovery in the US, where all the subprime mortgage trouble started, is more likely to gain traction into 2010. Job losses there are also tapering off. "For next year, we look for a decline back below $1.50, with the unwinding of USD shorts set to gather momentum as expectations of higher US interest rates rise and China takes another small step towards the creation of a free-floating yuan," said Broux.
The weakest outlook for euro/dollar in six months was $1.32 and on the 12-month horizon, an outright collapse to $1.20. Median forecasts had euro/dollar at $1.50 in a month, $1.50 in three months, $1.48 in six and $1.45 in 12 months. Those median predictions are slightly above results from last month, but mainly reflect the euro's rise since the November survey - gains made despite jitters on equity markets over the Dubai debt crisis that broke out last week.
At the start of the year, the outlook was very different. In the clutches of the worst financial crisis in many generations, these same forecasters said that the euro would close out the year at around $1.30. Only six of them had the euro at or above $1.50 by year-end.
Back then, very few were predicting the financial system would take such a decisive step back from the brink thanks to unprecedented taxpayer life support to banks and cash injections from the world's biggest central banks. But much has changed, notably a spectacular equity market rally and an equally eye-popping haemorrhaging of the US government's balance sheet, which both have put intense pressure on the US dollar against a wide range of currencies.
The most likely scenario appears to be a strong euro that only gradually starts slipping against the dollar as the US economic recovery builds up momentum and eventually leads to interest rate hikes - but not until late next year. A recent Reuters poll of 93 economists predicted no interest rate hike forthcoming from the US Federal Reserve until the third quarter of 2010. And a poll of 80 economists last week predicted no ECB move until the fourth quarter. For now, so long as investors are seeking risk in equities and in emerging markets while central banks keep rates low, the dollar is likely to remain under carry pressure.