Credit Suisse Group AG cut its forecast for the euro, saying the Greek debt crisis has dented the 16-nation currency’s credibility as a safe alternative to the dollar for many investors.
The euro will fall to $1.29 in the next three months, 10 percent lower than the bank’s previous forecast of $1.43, according to a Credit Suisse research note. The currency traded today at $1.3242.
“The slowness with which Europe has responded to Greece has led to contagion into the other southern euro-area periphery countries,” Ray Farris, London-based head of foreign-exchange research and an author of the note, said in an interview. “Our concern is that the contagion is severe enough that it requires monetary policy action from the ECB, in addition to the fiscal action that everyone already expects.”
The European Central Bank should use unconventional policy measures to restore orderly trading in government bond markets, including the purchase of government securities in the secondary market, Credit Suisse strategists wrote. This would be in addition to a package to ensure Greece, Portugal and Spain can avoid default while cutting their budget deficits, they wrote.
European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters today in Brussels he’s confident discussions on a financial aid package for Greece will conclude “in the next days.” Standard & Poor’s cut Greece’s credit rating to junk on April 27 and also lowered the ratings of Spain and Portugal this week.
After an initial rally when the Greek bailout package is completed, the euro will weaken on speculation that the ECB is locked into lower interest rates longer than the Federal Reserve, and foreign investors may rush to sell out of their positions, Farris said.
Investors should buy currencies not directly exposed to Europe, such as the Canadian and Australian dollars, Farris said. He also said the Brazilian real and the currencies of South Korea, Indonesia, the Philippines and India would benefit from a healthy investor appetite for risk.
“Our bias is away from trying to trade this highly uncertain European issue directly into Europe but rather to trade where we have a greater degree of fundamental confidence in view,” Farris said.