The euro risks dropping toward parity with the U.S. dollar over the next 2 1/2 years as the region enacts policies aimed at weakening the currency to bolster growth, Morgan Stanley said.
The 17-nation euro, which has slid 2.6 percent this year, will continue to decline as the bailout package for Cyprus fans concern about the safety of bank deposits in the region, Hans-Guenter Redeker, the head of global currency strategy at Morgan Stanley, said in an interview yesterday in Sydney. Italy’s struggle to form a government after last month’s divided vote will also weaken the euro, he said.
“This policy concerning Cyprus, people will be getting more concerned in funding the peripheral, providing deposits there,” Redeker said. “The long-term implication is that monetary transition in Europe is not working, there’s no credit, no growth, and fiscal policy is still fragmented. So, therefore, you need to be fairly pessimistic for the outlook.”
The euro traded at $1.2855 as of 12:14 p.m. in Tokyo after yesterday falling as low as $1.2829, the least since Nov. 22. The common currency will end the year at $1.25 and fall to $1.19 by the end of 2014, Redeker said. The median forecast of analysts polled by Bloomberg is for the euro to trade at $1.29 by Dec. 31.
“Within 2 1/2 years or so, you could be very close to parity, so the risk of an undershoot is quite significant,” he said.
Euro-area services and manufacturing output contracted more than economists estimated this month, adding to signs the region is struggling to emerge from recession. Gross domestic product in the fourth quarter fell by the the most since the first quarter of 2009.
While European Central Bank President Mario Draghi said earlier this month the region will gradually recover later in 2013, concerns about Cyprus have roiled markets. Under the terms of an agreement struck March 25, senior Cypriot bank bond holders will take losses and uninsured depositors will be largely wiped out.
The deal is “long-term a very negative thing,” said Redeker. Private-sector funding in indebted nations such as Spain and Italy will probably stay elevated compared to Germany, hampering the effectiveness of monetary policy across the region as austerity measures detract from growth, he said
“What is left is that Europe in autumn is going to do the Japan,” Redeker said, referring to policies that seek to weaken currencies to support exports and growth. “That type of policy is going to come on the agenda, and when we are getting into the third- and fourth quarter, it’s coming forcefully through.”