Morgan Stanley Says Draghi Stimulus Can’t Stop Euro’s Bull Run

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  • Bank sees ECB monetary policy ineffective against inflows
  • Dollar may run out of steam as Fed rate-increase outlook dims

European Central Bank President Mario Draghi can’t stand in the way of a rising euro, according to Morgan Stanley.

The shared currency will probably climb another 5 percent against the dollar by the end of this year, adding to its 3.5 percent gain in 2016, predicted the New York bank, which is the world’s 10th largest currency trader, according to Euromoney magazine. And when ECB officials meet Thursday, their efforts to stimulate growth and spur inflation in the region will probably be frustrated by a stubbornly strong currency, according to Hans Redeker, Morgan Stanley’s chief global currency strategist in London.

The euro and yen have strengthened this year as traders speculated that stimulus efforts in Europe and Japan were reaching their limits. That diminished monetary policy divergence with the U.S. Federal Reserve, which held off on raising interest rates and caused the dollar’s rally to fizzle against its biggest peers.

“We have a bullish euro picture -- the euro will climb against a wall of worries,” Redeker, referring to rising euzo-zone political risks, said via e-mail. “There is very little the ECB can do to prevent euro strength,” he wrote separately in a report.

More easing by the central bank will fail to counteract inflows in the euro that will drive the currency higher, while cash-strapped European banks keep money at home, Redeker said. Morgan Stanley’s bullish view contrasts with a median forecast for the common currency to weaken to $1.09 by year-end, according to an estimate of analysts surveyed by Bloomberg.

The euro was little changed at $1.1241 and 114.32 yen as of 8:25 a.m. in Tokyo.

Most economists surveyed by Bloomberg predict the ECB will extend quantitative easing before year-end, given that regional inflation remains well below the central bank’s goal of close to 2 percent.

The common currency may also get a boost relative to the U.S. dollar, Redeker said. That’s because the greenback’s recent rally will probably run out of steam given the likelihood that the Fed will maintain a slow pace of monetary tightening.

The euro-dollar exchange rate is stuck in the $1.05 to $1.15 range because of limited divergence in monetary policy, a rising current-account surplus in the euro zone and declining economic and political risk in the region, according to Standard Bank Group Ltd.

“It looks as if the stability will persist and, if we had to bet on the likely direction of the break, when it comes, we suspect it will be to the upside,” Steven Barrow, the bank’s head of currency strategy in London, wrote in a note.