Concern that some European countries will struggle to pay their debt has driven the euro down 12 percent versus the dollar since 2008 and may push it even lower, according to Nomura Holdings Inc.
The euro may fall to as low as $1.31 if sovereign-debt problems escalate, Jens Nordvig, a managing director of currency research at Nomura in New York, wrote in a note to clients. The crisis currently accounts for a 12 percent risk premium on the currency, Nordvig wrote, citing a Nomura model.
The 16-nation currency fell 0.5 percent to $1.3619 today in New York, near a six-week low of $1.3574 reached on Nov. 12. While it has dropped 4.9 percent versus the greenback this year, it has surged 14 percent from a 2010 low on June 7 on concern that a new round of a Federal Reserve bond purchase program known as quantitative easing will debase the dollar.
“The euro has been on a roller-coaster ride over the last year,” Nordvig wrote. “There has been significant upside pressure on euro-dollar from the Fed’s initiation of QE2. Meanwhile, peripheral tensions within the euro zone have risen again, putting notable downward pressure on the euro.”
The euro will trade at $1.38 in six months if sovereign risk remains roughly constant, Nordvig wrote. The currency will drop to $1.33 if debt concern increases, and $1.31 if the European debt crisis has an impact on real-rate expectations. The shared currency will strengthen to $1.44 if sovereign-debt risk abates, he wrote.
Investors should trade the euro versus other European currencies, and not just the dollar, Nordvig said today in a radio interview on “Bloomberg Surveillance” with Tom Keene.
“The euro crosses, like euro-Sweden, euro-Norway and euro-sterling, have not fully reflected it like it’s been reflected in euro-dollar,” Nordvig said.