The euro will probably drop to $1.20 by year-end as Europe’s debt crisis worsens before it improves, according to State Street Corp., which oversees $16.9 trillion in custody assets.
Investors should sell the 17-nation euro and buy the U.S. dollar, said Collin Crownover, head of currency management at State Street Global Advisors. The greenback will strengthen because the prospect of further asset purchases by the Federal Reserve is less likely than market pricing indicates, he said.
The euro has fallen more than 21 percent from its 2008 peak as the bloc’s fiscal crisis pushed economies into recession, driving up borrowing costs for the most heavily indebted nations and forcing Greece, Ireland, Portugal and Spain to seek bailouts. A mix of rescue funds and austerity programs has yet to halt financial-market contagion, prompting billionaire investor George Soros to warn Europe that a failure by leaders at a summit this week to produce drastic measures could spell the demise of the currency.
“You need events to get bad enough that you can sell the population on the necessity of a bigger bang solution to the euro-zone crisis,” Crownover said today in an interview in Sydney. “We’re advising our investors to reduce their currency exposure to the euro.”
The euro traded at $1.2542 as of 1:07 p.m. in Tokyo, 3.2 percent below its level at the end of 2011.
The outlook for the U.S. economy is more favorable, according to Crownover, and the dollar is “reasonably cheap.”
“You probably don’t want to get too carried away with the doom and gloom scenarios of a double-dip recession,” said Crownover, who is based in Boston. “It could happen, but it doesn’t seem like we’re there yet.”
The U.S. central bank has engaged in two rounds of so-called quantitative easing, buying $2.3 trillion of assets in a bid to lower borrowing costs and stimulate the economy. Fed Chairman Ben S. Bernanke will probably refrain from implementing a third wave of purchases unless the situation deteriorates, Crownover said.
Policy makers “don’t have that many bullets left in the arsenal,” he said. “They want to keep that QE3 powder dry,” he said.
Latin American nations may also benefit from the relative strength of the U.S. economy, with the Mexican and Colombian pesos two currencies that Crownover favors.
A slowdown in growth in China, the world’s largest consumer of raw materials, would help buoy the U.S. currency against those of commodity producing nations such as Australia, New Zealand and Canada, he said.
“We’re slightly short the commodity currency complex,” he said. A short position is a bet that the price of a currency or asset will decline.
While he doesn’t foresee a so-called “hard landing” for China, Crownover does expect a steeper deceleration than the consensus view. He predicts China’s annual growth rate will slow to around 6 percent to 7 percent, even with government stimulus measures.
China’s economy will slow to 8.1 percent growth this year from 9.2 percent in 2011, according to a Bloomberg News survey of 28 economists, with the most recent forecasts given greater weighting.
Crownover forecasts the Australian dollar will fall to around 93 to 95 U.S. cents by year-end from its current level of $1.0031.