Euro to Rise Further on Growth, Says Chandler of Brown BrothersCordell Eddings
The euro, the biggest winner among 10 developed-nation currencies over the past year, is poised to gain further as economies in the currency bloc recover and global growth stokes demand for European products, said Marc Chandler of Brown Brothers Harriman & Co.
Countries such as Spain and Italy, whose borrowing costs soared to 15-year highs as they cut government spending amid the region’s longest recession ever, are starting to rebound and are bringing back investors, Chandler said in a radio interview on “Bloomberg Surveillance” with Tom Keene.
“Continued buying of peripheral debt is the real story,” said Chandler. “A lot of investors who were underweight Europe are buying euros to buy Italian, Spanish and other peripheral European debt.”
Europe’s common currency rose over the past year against all nine developed-country peers monitored by Bloomberg Correlation-Weighted Currency Indexes. The euro and Denmark’s krone each gained 4.2 percent against the dollar last year, the most among the greenback’s 16 major counterparts. The 18-nation European currency declined 0.7 percent to $1.3672 in trading today in New York.
The median forecast of 84 analysts and economists surveyed by Bloomberg is for the euro to depreciate to $1.28 by the end of 2014.
The euro region’s economy returned to growth last year after contracting for six consecutive quarters starting at the end of 2011. The economy expanded 0.3 percent and 0.1 percent in the quarters ended in June and September. It will grow 1 percent this year, compared with 2.6 percent for the U.S., according to Bloomberg economist surveys.
“Many of the countries on the periphery are seeing much better export performance than people thought likely,” Chandler said. “A stronger euro has not coincided with weakness in European exports. But really the revival in European exports has come as the euro-zone economies recover and as the U.S. economy recovers.”
Since European Central Bank President Draghi said in July 2012 policy makers were “ready to do whatever it takes” to preserve the euro, the currency has climbed 11 percent versus the dollar.
The euro gained even after Draghi said Dec. 5 interest rates will be kept low “for an extended period,” while the U.S. central bank prepares to reduce bond purchases under the quantitative-easing stimulus strategy. The Federal Reserve said Dec. 18 it will pare the program to $75 billion a month, from $85 billion, in January and may take further “measured steps” depending on how the economy performs.
Fed policy makers also said they would keep their benchmark interest-rate target low. It has been zero to 0.25 percent since 2008. Treasury two-year note yields, which are sensitive to interest rates, were 0.38 percent today, after averaging 0.3 percent over the past year.
“The market is coming around to the view that tapering is not tightening,” Chandler said. “We are not getting the rise in the short end of the U.S. yield curve, and that is preventing the dollar from getting much stronger against the euro.”
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