Dollar May Extend Rally Against Euro After Rescue Plan, Deutsche Bank Says

The dollar may extend this year’s 12 percent climb against the euro even after Europe crafted a $1 trillion plan to rescue Greece and other debt-laden governments, said Deutsche Bank AG, the world’s biggest currency trader.

“The risk of default has receded for the time being, but emergency measures alone will not be enough to lift the euro,” said Koji Fukaya, a senior currency strategist in Tokyo at Deutsche Bank. Europe needs sustained efforts to rebuild the finances of indebted nations, not just emergency loans, he said.

“The euro is still overvalued” based on the gap in bond yields and in the differing degrees of economic recovery between the U.S. and Europe, he said. “It wouldn’t be surprising if the currency fell below $1.25 by the middle of the year.” Purchasing power parity, a measure of the relative cost of goods, shows the euro’s long-term neutral level at $1.15 to $1.20, he said.

The U.S. currency advanced for the first day in three, rising 0.2 percent to $1.2763 as of 12:30 p.m. in Tokyo. It declined to 92.91 yen from 93.29 yesterday in New York.

The dollar rose to $1.2529 versus the euro on May 6, the strongest level since March 2009. That’s a 17 percent gain from the $1.5144 level on Nov. 25, the weakest since August 2008.

The U.S. currency will also advance against the yen, Fukaya said.

“The dollar may hit 95 yen by the end of June,” he said. “The yen’s climb against the greenback will be limited in an environment that would allow investors to take risks,” he said.

Yield differentials between Japan and the U.S. are widening as the U.S. economy recovers, and the current turmoil in the financial market isn’t as extensive as the financial crisis after September 2008, Fukaya said.

The U.S. currency rose above 93 yen yesterday after falling to a five-month low of 87.95 yen on May 6. The greenback strengthened to 94.99 yen on May 4, the highest level since August.

To contact the reporter on this story: Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net.

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