Euro Poised to Weaken Against Dollar, Barclays Says

The euro is poised to decline against its counterparts in the U.S. and U.K. as well as those in emerging markets such as Brazil amid monetary easing from the European Central Bank, according to Barclays Plc.

“We have a fairly high degree of conviction about our euro call,” Ajay Rajadhyaksha, the New York-based co-head of global fixed-income, currencies and commodities research at Barclays, said today at a media conference. “That conviction is driven almost exclusively by our fundamental view that the monetary policy in the ECB is going to diverge very significantly from that in the U.S. and that in the United Kingdom.”

European policy makers cut their deposit rate to an unprecedented minus 0.1 percent this month, with President Mario Draghi pledging additional measures if required. They lowered the benchmark rate to a record 0.15 percent, and in a bid to get credit flowing to parts of the region’s economy that need it, they also opened a 400 billion-euro ($543.8 billion) liquidity channel tied to bank lending. Investors are looking for hints from the U.S. Federal Reserve and the Bank of England on when their interest rates will begin to rise.

Barclays favors betting against the euro versus the dollar and pound, and picking up extra yield by buying India’s rupee, and Brazil’s real, Rajadhyaksha said. The real has rallied the most among the shared currency’s major peers this year, gaining 8.1 percent. The rupee has appreciated 3.9 percent, the pound 3.9 percent and the U.S. dollar 1.1 percent versus the euro.

‘More Resilient’

“We do believe that EM is more resilient this time around in terms of being able to withstand a pickup in” U.S. interest rates, he said.

The Fed, on pace to finish tapering its bond purchases in October, will increase its benchmark interest rate earlier than markets are expecting, said Dean Maki, chief U.S. economist at Barclays in New York. Rising inflation will spur the central bank to boost its target rate for overnight lending between banks to 1 percent in 2015, he said.

“We see the first tightening in June 2015, well before the market expects it,” Maki said. “We look for a 1 percent funds rate at the end of 2015. I’d say the risk to those are slightly to the upside. They could go even sooner than that and tighten a bit more.”

Fed policy makers cut monthly debt purchases by $10 billion to $35 billion at their June 17-18 meeting, while leaving the target rate for overnight lending between banks in the range of zero to 0.25 percent, where it has been since December 2008.

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