Morgan Stanley Boosts Dollar Forecast as Greece Undermines ECB Credibility

Morgan Stanley raised its forecast for the dollar’s value against the euro to $1.16 from $1.24 by the end of the year after the Greek debt crisis “undermined” the European Central Bank.

The 16-nation currency touched a four-year low of $1.2144 on May 19 as Germany’s ban on some speculative trades against bank and government credit quality added to concern Greece’s funding crisis would spread through the region. The ECB had said on May 10 it would start buying public- and private-sector debt as part of a bid to halt the fiscal crisis and rescue the euro.

“The initial fiscal problem in the periphery (Greece) has now become a fiscal problem for core Europe,” Morgan Stanley’s Stephen Hull in London wrote in a report today. “More importantly for the euro, it has also undermined the credibility of the ECB.”

The shared currency will reach a low around $1.12 in the first quarter of 2011 before recovering later in the year, the research note said. It will probably rise against the pound, buying 90 pence by the end of the year from 84.77 pence today, Morgan Stanley predicted. The U.K. currency will probably fall to $1.29 in December from $1.4582 today.

“We see the dollar being well supported for the remainder of 2010,” Hull wrote in the report. “U.S. growth is still surprising on the upside.”

Morgan Stanley cut its forecast for the dollar versus the yen, citing data showing a larger flow of funds into Japanese equities from investors outside the island nation. The New York- based financial institution predicts gains in the U.S. currency to 98 yen by the end of the year, less than its previous estimate of 109 yen. One dollar bought 91.04 yen as of the U.S. close today.

The greenback will probably reach the 109 level versus the yen by the end of 2011, Hull predicted.

To contact the reporter on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net

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