December 12, 2011

Euro Forecasts Fall as Draghi Drops Rates

Analysts expect further weakness in joint currency without interest rate support

As European Central Bank President Mario Draghi cuts interest rates put in place by his predecessor, Jean-Claude Trichet, analysts are taking note—and cutting their forecasts for euro value, saying the higher interest rates now on their way out have been one of the main supports on which the currency’s value rested.

European Central Bank headquarters (Photo: AP)Bloomberg reported Monday that Draghi’s move to reverse Trichet’s interest rates has led to analysts revising their estimates for the euro downward—at a fast pace. Draghi cut interest rates on Nov. 3, and since then, analysts have cut their year-end 2012 euro estimates from $1.40 to $1.32. The euro has lost ground against every major currency, with the exception of the Swiss franc, since the rate cut, when under Trichet it had gained against 12 out of 16.

Investors have been dropping euro-denominated assets like so many hot potatoes during the ongoing struggle to contain the currency bloc’s debt problems. While optimists see opportunity, feeling that it can’t get much worse, pessimists are still crowding the exits and pointing to a growth forecast of 0.5% for the eurozone—not a healthy economic sign. The U.S., in comparison, is forecast to grow 2.19% in 2012.

Ken Dickson, investment director of currencies at Standard Life Investments in Edinburgh, which manages about $235 billion, said in a statement last week, “There still has to be further monetary easing by the ECB to support growth in the euro area for 2012 and beyond. There’ll be further weakness, particularly in the first half of next year.” Instead, policy seems to be moving in the opposite direction.

Samarjit Shankar, a managing director for the foreign-exchange group at Bank of New York Mellon Corp. in Boston, was quoted saying, “There’s an element of disappointment in that much more could have been done. The tolerance of investors has been severely tested and there’s a general expectation that a lot more needs to be done.”

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