Euro Set to Rally on ECB Taper Talk, UBS Wealth Management Says

  • UBS strategists project euro will reach $1.20 in 2017
  • Central bank meets Oct. 20 to review monetary stimulus

The euro is poised to rally against the dollar as speculation that the European Central Bank is considering tapering its bond-buying pushes the currency toward its fair value, according to UBS Group AG.

Europe’s single currency strengthened against most major peers Thursday. The climb comes at a time when the euro region’s yields have ticked up as traders mull whether the ECB may provide more clues to the future of its stimulus measures when it announces its next policy decision on Oct. 20.

"Europe has enjoyed a long period with an undervalued currency," strategists at UBS Wealth Management led by Thomas Flury wrote in a note. "The euro should eventually begin appreciating, driven by a rise in inflation and/or signals that the European Central Bank is discussing tapering its quantitative easing program."

UBS projected the shared currency will climb to $1.20 in 12 months and may revert to its fair value of $1.25. The median forecast in a Bloomberg survey shows an estimate of $1.10 for the end of 2017.

The euro has been resilient amid speculation the ECB is running out of ammunition for its 1.7 trillion-euro quantitative-easing program. The currency has appreciated 1.6 percent this year against the dollar, driving concern a drop in exports may slow economic growth in the region.

The 19-nation currency rose 0.5 percent to $1.1056 as of 5 p.m. in New York. That’s the first advance in four days. It ended the day at 114.66 yen.

The ECB "has to and it will taper," Flury said. "It will most likely make the announcement sometime next year."

UBS is also basing its case on parts of the outlook for economic and consumer conditions in the U.S., including a steadily deteriorating current account deficit and savings rate. The greenback is overvalued versus other Group-of-10 currencies and is due to weaken, according to the firm.

Europe will return to "a more stable footing and therefore offers an attractive alternative,"
Flury wrote. "International investors will seek better diversification and reduce U.S. dollar holdings, which typically hurts the dollar. We expect the euro to rise more significantly."

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