World’s Largest Private Bank Makes Contrarian Call on Euro Rally

  • Euro to climb to $1.15 in six months, UBS’s Haefele says
  • Investors should expect a less dovish ECB policy tone

At a time when some investors are questioning the future of the euro, the world’s largest manager of money for the wealthy is advising clients to bet on a rally.

UBS Wealth Management recommends buying the European currency as it sees it being undervalued against the dollar and because of faster euro-area inflation. It expects the euro to climb about 7 percent to $1.15 in six months, while the majority of forecasters surveyed by Bloomberg expect it to slip to $1.03-$1.04 in the same time frame.

The euro has gained 2 percent this year to around $1.07, after slumping more than 20 percent in the past three years against the dollar as the European Central Bank’s easy monetary policy and political crises in the region weighed on the common currency. Burnbrae Group Chairman Jim Mellon, who backed Brexit, sees the currency union breaking up within five years.

With the potential for further upsets in European elections this year after the U.K. and Italian referendums in 2016, JPMorgan Chase & Co. recommends selling the euro against the Swiss franc to hedge against political risks, while Goldman Sachs Group Inc. sees the euro at parity with the dollar in 12 months. 

‘We don’t think the U.S. dollar is going to move as much as many people do,” Mark Haefele, Zurich-based global chief investment officer at UBS Wealth Management, said in an interview. “We don’t expect it to strengthen much from here because the Fed is still probably more important than the Trump administration policies in the next six months, and we think the Fed path has been priced in to a significant degree.”

The Federal Reserve is expected to gradually lift U.S. interest rates, while the ECB said this month it expects policy rates to remain at present or lower levels “for an extended period of time.” Still, annual inflation accelerated the most in more than three years to 1.1 percent in December, and ECB President Mario Draghi said the risk of deflation has largely disappeared.

“Investors should begin to adjust to a less dovish ECB policy tone in the coming months and appreciate the scale of the undervaluation on a longer-term purchasing-power parity basis,” Haefele said.

The euro’s fair value in terms of purchasing power parity stands at $1.25, according to UBS Wealth Management, which had the equivalent of 596 billion euros of invested assets as of September. UBS Group AG stood atop the private-banking industry, managing more than $3 trillion for the world’s wealthiest people, according to a study by London-based consulting firm Scorpio Partnership in July.