The euro is poised to hit the same level as the U.S. dollar within a month as the widening gap between interest rates and economic growth in the U.S. and Europe drags down the common currency, according to Wells Fargo.
Such a drop would mark the first time in two decades that the euro has equaled one dollar. The euro was little changed at $1.04 Tuesday, steadying from a three-day drop.
The currency touched a five-year low in mid-May and has weakened 8 percent against the dollar this year as the Federal Reserve’s aggressive monetary-policy tightening pushed interest rates in the U.S. well above those in Europe. Wells Fargo’s forecast comes amid growing speculation that the Fed may raise its key benchmark rate by as much as 75 basis points Wednesday, helping push a gauge of the U.S. dollar to its highest in over two years.
The Fed’s moves are exerting pressure on the euro because the European Central Bank is taking a less hawkish path, wrote Erik Nelson, the bank’s currency strategist. Underlying economic growth is also stronger in the U.S. than the eurozone.
“The return of USD strength has come sooner than we had expected,” Nelson wrote. “In our view, the question of parity is more of a ‘when’ rather than an ‘if.’ “
Meantime, shorting the euro against the dollar is a “risk off trade” that has further room to run as U.S. yields climb and investors pull out of risk assets. But positioning among leveraged funds is still balanced compared with other euro bottom-market cycles during which short positions were widespread, Nelson said.
“Some of those funds that tend to signal the market bottoms — they are not net short euro,” Nelson said in an interview with Bloomberg Television on Tuesday.
Source: sentinelsource.com
