Aug. 29 (Bloomberg) -- Goldman Sachs Group Inc.’s forecast for the euro to weaken to parity with the dollar comes as the region confronts escalating deflation and the risk that some of its biggest member states are falling back to recession.
Robin Brooks, the New York-based chief currency strategist, cut his six-month forecast today to $1.25 from $1.34, saying the European Central Bank will need to ease monetary policy further to counter falling inflation expectations. The 18-nation currency will weaken to parity by the end of 2017, he said. Goldman isn’t alone in cutting its outlook -- JPMorgan Chase & Co. also reduced its forecast today to $1.26 from $1.28 by the end of June 2015.
“The ECB will ease more, I don’t know what easing that will be, but that the direction of policy is pretty clear,” Brooks said in a telephone interview. “People had doubts whether the ECB is going to take low inflation seriously, those expectations are being updated.”
The euro had staged a 16 percent rally after ECB President Mario Draghi said he’ll do “whatever it takes” to save the currency in July 2012. Since reaching the high for the year on May 8, the euro has slumped 4.9 percent in the face of the weakest inflation in almost five years, a recession in Italy and zero growth in France.
Goldman cut the three-month estimate to $1.29 from $1.35 and the one-year forecast to $1.20 from $1.30. That’s one of the most bearish views among banks surveyed by Bloomberg, with the median forecast of $1.31 by the end of the year and $1.30 by the end of the first quarter.
The euro has slumped for seven consecutive weeks, the longest stretch in more than a decade. The shared currency was little changed at $1.3184 at 10:46 a.m. in New York.
Draghi last week pushed the central bank closer to quantitative easing by singling out the five-year, five-year inflation break-even rate, his preferred gauge of inflation expectations, sliding below 2 percent. Draghi previously said that a worsening of the medium-term inflation outlook would provide a reason for broad-based asset purchases. ECB officials meet Sept. 4.
In contrast, the U.S. is moving closer toward raising interest rates. The Federal Reserve has kept the benchmark rate at a record-low zero to 0.25 percent since December 2008, while futures traders saw about a 56 percent chance the central bank will start raising rates by July 2015, according to data compiled by Bloomberg.
The July Federal Open Market Committee meeting showed policy makers discussed the possibility that jobs gains may lead them to increase rates sooner than anticipated.
“The longer-term forecast to parity is a pure view that growth in the U.S. will outperform that that of the euro-zone,” Brooks said. “In terms of our euro forecast, we’re clearly signaling growth will be better in the U.S.”
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