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Morgan Stanley says dollar parity beckons for euro by Q4

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The US bank Morgan Stanley has forecast that the euro will sink below parity with the dollar before the end of this year, and election fever will drive down the pound to US$1.39 by June.

[LONDON] The US bank Morgan Stanley has forecast that the euro will sink below parity with the dollar before the end of this year, and election fever will drive down the pound to US$1.39 by June.

The forecasts for the euro's fall, after a month that has drawn the first expressions of doubt from major bank analysts about the pace and durability of the dollar's rise, are among the most aggressive yet issued, and predict the single currency will be worth just 98 cents by the fourth quarter.

They stem chiefly from expectations of continued euro weakness as the European Central Bank pumps billions more in newly-created money into the financial system, rather than a bullish view on the dollar.

"The anticipated reacceleration of the US economy should keep the dollar strong," the bank said in a note laying out its spring forecasts. "Yet, over the next couple of quarters, the pace of these gains will be muted relative to the brisk advances observed in the last three. Yield differentials will keep EUR under pressure, although JPY will surprise with its relative strength."

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Previously Morgan Stanley had forecast the euro at US$1.05 in Q4.

On sterling, under increasing pressure against the dollar ahead of parliamentary elections in May, the bank predicted a slide from around US$1.46 on Monday to US$1.39 by the end of June.

"Under our base case scenario of the next UK government being led by one of the major parties, we would expect renewed fiscal austerity, which will lead to a slower growth picture in the UK," the bank said, also pointing to the risks of a referendum on Britain's EU membership after the election.

Reuters polling of major bank strategists shows the euro falling just 2-3 cents against the dollar over the next year to reach US$1.03 in March of 2016.

REUTERS

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