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LONDON - The combination of growing confidence in Europe's economy and mounting evidence of a slowdown in the US is driving euro bears into hiding.
After tracking the euro's slide from about $1.45 at the beginning of 2010, the median forecast of currency strategists has stayed within two cents of $1.20 since the start of June, according to data compiled by Bloomberg. Goldman Sachs Group Inc and Wells Fargo & Co raised their estimates in the past two weeks, joining HSBC Holdings Plc and Deutsche Bank AG in predicting a stronger euro.
While the euro weakened 15 percent in the first half as the region's debt crisis threatened to tear the currency union apart, investors have shifted their focus to the US as the dollar depreciated 8 percent from a four-year high in June. US economic data fell short of economists' estimates this month by the most since March 2009, while euro-region reports exceeded forecasts since April, according to Citigroup Inc indexes.
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The euro sculpture outside the European Central Bank headquarters in Frankfurt, Germany. Hannelore Foerster / Bloomberg |
"People got a bit too excited about the idea the euro-area was going to break up and forgot that the US has a whole load of problems of its own," said David Bloom, global head of currency strategy at HSBC in London, who has predicted since the start of June that the euro would end the year at $1.35.
Confidence in the euro returned after the most-indebted countries in the region announced budget cuts and the European Union crafted a 750 billion-euro ($970 billion) financial backstop in May to forestall defaults. Spain, Portugal, Ireland and Greece successfully auctioned more than 17 billion euros of bonds and bills since July 13.
Speculation the recovery would accelerate increased when Germany's Ifo institute said July 23 that its business climate index unexpectedly jumped to the highest level since July 2007. A composite index of European services and manufacturing industries climbed to 56.7 in July from 56 the month before, London-based Markit Economics said a day earlier.
Investors showed little surprise on July 23, when the Committee of European Banking Supervisors said seven of 91 EU banks subject to stress tests failed with a combined capital shortfall of 3.5 billion euros.
The euro rose 0.2 percent to $1.2933 as of 8:48 a.m. in London, after appreciating in three of the past four weeks. The 16-nation currency appreciated 8.9 percent since June 7, when it slid to $1.1877, the weakest level since March 2006. It also advanced 2.5 percent since falling to a more than seven-year low on June 29, according to Bloomberg Correlation-Weighted Currency Indexes.
Analysts are raising their forecasts as Citigroup's euro- region economic surprise index reached a three-year high of 131 on May 27. The equivalent US gauge fell to a 16-month low of minus 43.6 on July 1. The measures examine historical standard deviations of data surprises by comparing releases with Bloomberg median estimates.
Goldman Sachs analysts led by Thomas Stolper in London reversed their outlook for the euro twice in two months, and said in the most recent forecast that the dollar will weaken against the euro by January as US growth slows. The New York- based bank says the shared currency will reach $1.22 in three months, $1.35 in six months and $1.38 in a year. As recently as June, Goldman Sachs forecast the dollar would surge to a seven- year high.
"Weaker US growth, reasonably solid euro-zone macro data and less political-fiscal disruptions than feared have been a feature of the past few weeks," Goldman Sachs analysts wrote in the report dated July 14.
Wells Fargo, based in San Francisco, raised its six-month euro forecast to $1.24 from $1.20 on July 14, said Vassili Serebriakov, a currency strategist in New York.
"The main positives for the euro have been stronger-than- expected euro economic numbers and a recovery in risk appetite," he said. Serebriakov said the euro will weaken longer term, falling to $1.18 in 12 months.
While US growth has slowed more than forecast, the economy will still outpace Europe over the coming year as budget cuts start to brake the recovery, said Ian Stannard, a senior foreign-exchange strategist in London at BNP Paribas SA.
Bloomberg News
