Forecasters Predict Euro Parity

According to a recent Bloomberg survey, a collection of leading currency experts predict that the euro could fall to parity with the US dollar by the end of 2011. Continued weakness in the euro zone economies, coupled with a new-found dedication to reducing deficits, will maintain downward pressure on the euro, according to industry experts.

We have been talking for some time now about the common dilemma facing EU nations. Essentially, trying to support the economy through targeted spending, runs counter to the need to address out-of-control deficits. Indeed, this was one of the key agenda items in the G8/G20 Summit held two weeks ago in Toronto. The G8 leaders – with the exception of Japan – agreed to maintain current stimulus plans in the short-term to help support struggling economies. Still, it was imperative to acknowledge the risk represented by perpetual deficits; this was accomplished by agreeing to a target of a 50 percent reduction in deficit levels, over the next three years.

Reducing Deficits – Proceed With Caution

The so-called PIIGS nations including Portugal, Italy, Ireland, Greece, and Spain, have either already suffered ratings downgrades, or have received debt rating warnings. In response to the building crisis, Greece and Spain have implemented deep and widespread spending cuts. Despite feverish public outcry, these countries have no choice but to continue on the austerity path, or face the very real prospect of defaulting on their debt obligations.

Other countries, including major economies like the UK and Germany, have also recently passed budgets that impose dramatic spending reductions. The new Tory-led coalition government in the UK has identified savings of 40 percent, while simultaneously implementing new tax increases to replace revenue lost during the recession. Germany has introduced a combination of new taxes and spending cuts that are expected to save as much as $96 billion over the next three years.

The long and short of all this, is that government spending will fall considerably in Europe over the next few years. Consumer buying power will also be eroded as savings will be lost to new fees and taxes. The withdrawal of money and government activity in this manner, is bound to slow the recovery. The more negative of the euro-bears, even warn of a return to recession if too much is cut, too quickly.

Differing Opinions

While some analysts are more pessimistic than others, there is universal agreement that the euro could fall to within the range of $1.10 to $1.15 or so by the end of this year. However, beyond 2010, opinions differ, with some suggesting the euro will continue to plunge all the way to parity, while others see the euro recovering to $1.25 to $1.30 by the end of 2012.

“Our overall view is that the euro will continue to weaken and Australia, New Zealand, and Canada will rebound over the next year,” noted Nick Bennenbroek of Wells Fargo in New York. These are medium-term trades we believe people should be putting on now.”

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.