Happy Days Are Here [Coming] Again

cassidain

Senior Insider
August 29, 2014 5:46 PM WSJ
U.S. Dollar Will Achieve Parity With Euro by 2017, Says Goldman



The euro is on its way to parity with the dollar by the end of 2017, say analysts at Goldman Sachs Group
The currency has dropped 5.75% since hitting a 2014 high in March, closing on Friday at 1.3133. Goldman says that decline is the beginning of a long drive lower. Higher U.S. interest rates versus those in the euro zone will cause investors to move money out of Europe and into higher-yielding markets, writes Goldman’s currency research group.
In six months, Goldman predicts the euro will drop to $1.25. In 12 months, it will be at $1.20. The single currency should hit $1.15 by the end of 2015, and $1.05 one year later. By 2017, the euro will hit parity for the first time since 2002, the year it entered circulation as a physical currency.




“Because we believe the dynamics of the euro have fundamentally changed and because we expect cyclical outperformance of the U.S., a prolonged period of euro undervaluation can be expected,” the Goldman analysts write.
On the dollar side of the equation, the Federal Reserve is likely to raise interest rates in 2015, pushing up yields on Treasurys and widening the existing gap between 10-year debt in Germany and Spain, which yield 0.894% and 2.227%, respectively. The U.S. 10-year note yields 2.334%.
Higher U.S. rates make the dollar more alluring to investors, as it increases returns on assets denominated in the currency. With yields on sovereign debt in the euro bloc so low, euro-zone investors are looking elsewhere for yield. Their search should trump foreign flows into the euro area, according to Goldman, as yields on debt for peripheral euro-zone members have already fallen significantly.
Though Treasurys currently yield more than much euro-zone debt, the dollar has only recently begun to make gains against other major currencies. Moves higher against the yen and the British pound, for example, only really started about a month ago.
“We think the dollar still has room to catch up with the two-year rate differential, which is currently the most dollar-supportive since mid-2009,” Goldman analysts write.
Meanwhile, the European Central Bank stands ready to enact further measures to battle low inflation and stimulate growth. ECB President Mario Draghi has tried to talk down the euro on numerous occasions, even saying at the August policy meeting news conference that “fundamentals for a weaker exchange rate are today much better than they were two or three months ago.”
At the Jackson Hole, Wyo., symposium for central bankers one week ago, Mr. Draghi lowered the inflation outlook for the euro zone and said more easing measures from the central bank were necessary. The central bank meets next week to set policy.
Investors are already heavily bearish on the common currency; the value of net bets against the euro for the week of Aug. 19 totaled $23.1 billion, according to the Commodity Futures Trading Commission, the highest since June 2012, during the euro crisis.
 
For interest rates to go up, there has to be more demand for the dollar. I don't know where this demand will come from. I don't see the Government, which controls the Fed, which controls interest rates, advocating for an increase in rates , costing it billions.
 
Well no, for interest rates to go up all the Fed has to do is start raising it's rate say 1/4% every quarter until mortgage rates are up in the 7's and not let the banks park their (your) money with them and collect interest on it. That's a simple start.
 
Come on, baby.

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$1.20/euro seems to have been a sticking point for the last 10 years. I'll take that over $1.40 or $1.50, but GS's parity prediction sounds much sweeter. Payback.
 
For interest rates to go up, there has to be more demand for the dollar. I don't know where this demand will come from. I don't see the Government, which controls the Fed, which controls interest rates, advocating for an increase in rates , costing it billions.

More demand or fewer dollars. Private debt in the U.S. is shrinking, this will drive the dollar higher.
 
[h=1]Euro to fall below parity with dollar by 2017 -Deutsche[/h]Reuters - UK Focus – 3 hours ago








[h=3]Companies:[/h]



[h=3]RELATED QUOTES[/h]
SymbolPriceChange
GS-PB24.95-0.02

DBK.DE26.58-0.61

BARC.L230.30-2.00





LONDON, Oct 7 (Reuters) - The euro's exchange rate against the dollar will fall to $0.95 by 2017, taking the single currency back below parity for the first time in more than a decade, according to a report by Deutsche Bank (Xetra: 514000 - news) .
The call by Germany's biggest bank, the world's second largest currency trader, is the most aggressive yet from a major investment house, the majority of whom have already turned overwhelmingly bearish on the euro.
The report, arguing that rock bottom investment returns and huge trade surpluses would drive a flood of capital out of Europe, implies a further 25 percent depreciation of the euro. The currency has already slumped 10 percent since May, when it reached a two-and-a-half year high just under $1.40.
The consensus view among the major foreign exchange players is that the euro will continue to slide over the next year but it was last worth less than one dollar in 2002, the end of an early stage crisis of confidence in the euro project.
Barclays (LSE: BARC.L - news) has predicted the euro will fall to $1.10 in a year's time and continue to fall thereafter. Goldman Sachs (NYSE: GS-PB - news) has it at parity with the dollar in 2017.
Current account surpluses are generally seen as a positive for currencies and many commentators have pointed to Germany's huge overspill on trade as one of the key factors propping up the euro in the first half of this year.
Deutsche's George Saravelos, however, said that instead it would be that surplus, allied to the climate of ultra low domestic growth, that would shrink returns on any investment in Europe and so drive the euro lower.
"We expect Europe's huge excess savings combined with aggressive ECB easing to lead to some of the largest capital outflows in the history of financial markets," he wrote in the note sent to clients late on Monday.
"At around 400 billion dollars each year, Europe's current account surplus is bigger than China's in the 2000s. If sustained, it would be the largest surplus ever generated in the history of global financial markets. This matters," he wrote.
Saravelos said that by weakening the euro with asset purchases, and keeping returns on bonds and savings in Europe at very low levels, the European Central Bank would only add to the pressure for capital to be sent abroad to earn.
"Euroglut means that as the world's biggest savers, Europeans will drive international capital flow trends for the rest of this decade," Saravelos said.
"Europe will become the 21st century's largest capital exporter. The next few years will mark the beginning of very large European purchases of foreign assets." (Reporting by Patrick Graham, Editing by Jamie McGeever/Ruth Pitchfo




 
Just think, that villa that set you back $4200/week last year will only cost you $2850 in 2017 . . . if Deutsche Bank is correct. "Yes, Wimco, you heard me correctly, I said we'll be staying three weeks this time."
 
Actually, the villa will likely still cost you $4200/week, but a €3000 hotel stay ($4200 at a 1.4:1 exchange rate) will only cost you $2850 (€3000 at a .95:1 exchange rate). Typically, villas are priced in US Dollars, and hotel rooms are priced in Euros.

For reference, in high season a 1BR Villa Suite at Le Toiny is €1790/day, €995/day in low season, and €815 in Summer.

I do note that wine lists are priced in Euros too, and there are a few that I might be encouraged to pillage a bit more vigorously...
 
Actually, the villa will likely still cost you $4200/week, but a €3000 hotel stay ($4200 at a 1.4:1 exchange rate) will only cost you $2850 (€3000 at a .95:1 exchange rate). Typically, villas are priced in US Dollars, and hotel rooms are priced in Euros.

For reference, in high season a 1BR Villa Suite at Le Toiny is €1790/day, €995/day in low season, and €815 in Summer.

I do note that wine lists are priced in Euros too, and there are a few that I might be encouraged to pillage a bit more vigorously...

This is very curious, Kevin. Villas and hotels are located in the same euro-based country. They are both bought and sold in euros. Their values are expressed in euros. They pay taxes, utilities, cleaning, upkeep, improvements, etc in euros. Many of their owners live in euro-based economies. Other than expressing villa rental rates in dollars for the convenience of an American clientele, I can't quite follow why villa rentals wouldn't be tied to exchange rates.
I asked an agent of one of the principal agencies (not Wimco) about this and was told that he or she didn't think the exchange rate would alter rental rates expressed in dollars. Amazing, especially given the fact that one can easily rent directly from owners in euros. Someone is going to pay a 20-30-40% premium to rent through an American-based rental company?
 
Curious it is, but it's the way that it has been for as long as I can remember. Rentals were quoted in USD in the days of the French Franc, and they continue to be quoted in USD today. I've both gained and lost from the practice.

As to paying a premium, there are good reasons for most people to rent through an agency, but that's a topic for a different thread on a different day.
 
A wise man once said "If it ain't broke, don't try to fix it!"
Rosita quotes to Americans in dollars but I would guess to Europeans in euros??? Perhaps you could weigh in, Rosita. Personally, I've been renting in euros and would welcome a euro that continues to weaken.
 
Villas are priced in dollars for good reason. On an annual basis, most villa rentals are to Americans, especially in High Season. In my last 14 years as a owner of villas, more than 95% of my rentals have been to Americans (although, I admit, my villas may appeal more to Americans than others).

The one thing that American renters don't really like is an unpredictable rental cost. Charging in dollars solves that problem. With the villa rental, airfare, and even rental cars priced in dollars, the overall vacation cost becomes quite predictable.

That is, until you go boutique shopping and then to dinner at Le Ti....

~ Jean d'Arme ~
 
Actually the French government doesn't want the villas posted in dollars so there may be a change in that coming down the road...
 
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