The euro will decline to its lowest level in almost three years as a bailout for Cyprus raises the threat of further euro-zone contagion, according to Morgan Stanley’s Ian Stannard.
“What we’re now seeing, with regards to the continued levels of uncertainty that have been building in the market, is a case where the euro is going to remain under some pressure in the near-term,” Stannard, head of European currency strategy at Morgan Stanley, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Joe Brusuelas. “The euro is going to continue to remain under pressure over the coming year into next year.”
The 17-nation currency will fall to $1.26 in the next year as investors lose confidence in the market, followed by further depreciation to the $1.19 area, Stannard said. That would be the weakest level for the euro since June 2010.
The euro gained 0.3 percent to $1.2819 at 2:18 p.m. New York time, paring its second weekly loss. It reached $1.2751, its low for the year, on March 27. The shared currency declined 0.1 percent to 120.52 yen.
Cyprus avoided default and an exit from the 17-nation euro by bowing to demands by European leaders to shrink its banking system, including imposing losses on uninsured depositors at the island’s biggest bank, in exchange for a 10 billion-euro ($12.8 billion) assistance package.
“What we could see is deposit shifts or capital shifts taking place within the euro zone if we start to see a move away from weaker banks into stronger banks,” Stannard said. “That could create internal imbalances.”
The European Commission forecast in February that the region’s economy will shrink 0.3 percent in 2013, marking its first annual back-to-back contraction since the euro was introduced in 1999.
“The euro is reacting as much to data shocks as to event risks,” Stannard said.
The median projection of 62 strategists surveyed by Bloomberg calls for the euro to reach $1.29 by year-end before depreciating to $1.27 by the end of 2014.