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.
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.