Euro May Weaken to $1.18 in First Half of Year, Brown Bros.' Chandler Says

by Lucy Meakin - Jan 14, 2011 10:14 PM GMT+0800

The euro may weaken to $1.18 by June as the European debt crisis weighs on sentiment, according to Marc Chandler, chief currency strategist at Brown Brothers Harriman & Co.

“We can go back to where we were in the spring of 2010, when the Greece crisis reached a mini-climax and the euro was down at its birth rate, which is sort of the high teens, $1.18- $1.19,” Chandler said in an interview in London two days ago. “We can see that this year, perhaps in the first half.”

Analysts are divided as to whether the euro will strengthen versus the dollar this year as nations such as Portugal and Spain aim to refinance their debt and the U.S. budget deficit widens. The euro jumped past $1.33 yesterday after European Central Bank President Jean-Claude Trichetsignaled he’s prepared to raise interest rates to tame inflation. The 17- member common currency had its biggest loss against the dollar in five years in 2010 as the debt crisis worsened.

Chandler, who also favors the Canadian dollar and South Korea’s won, said the Swiss franc will resume its gains against the euro. Portugal, with a budget shortfall of more than twice the European Union limit, will seek aid from the EU by the end of the first quarter, prompting demand for the Swiss currency as a haven, he said.

“People have suggested that the Swiss franc is the modern, post-euro deutsche mark, the place people go for safety,” he said. “Partly it’s a fad, but appetite is very strong as long as the European debt crisis continues. It wouldn’t surprise me to see another 5 to 7 percent appreciation of the franc over the coming months as the debt crisis heats up again.”

Diverging Outlook

Chandler’s outlook contrasts with Goldman Sachs Group Inc., which yesterday recommended buying the euro versus the dollar given European efforts to calm the debt crisis. BNP Paribas SA, which yesterday said the euro’s gains were unsustainable, today reversed its view on Trichet’s “significant change in tone.”

Morgan Stanley currency strategists led by Stephen Hull said yesterday that the reaction to euro-supportive news this week is “overdone,” and that sovereign-risk concern will return. Standard Life Investments, the Scottish fund manager, is betting the dollar will rise against the euro in the first quarter.

The single currency was little changed at $1.3344 at 1:43 p.m. in London today and appreciated 0.3 percent to 1.2918 Swiss francs. The euro was the worst-performing major currency against the dollar in 2010, sliding 6.5 percent.

Emerging Markets, Canada

The franc is down almost 2 percent versus the euro since Trichet’s remarks, though it has appreciated 6 percent against the euro since the start of November. It’s slipped 2.8 percent this year against a basket of 10 developed-country currencies, according to Bloomberg Correlation-Weighted Currency Indexes.

Among emerging-market currencies, Chandler said he’s shunning the “overplayed” Brazilian real. He recommends the South Korean won, Thai baht and Indonesia’s rupiah.

Canada’s dollar is “highly correlated with oil prices, it benefits from the recovery of the U.S. economy and they’ve got a strong banking system,” Chandler said. “Out of the dollar block, Canada looks to me to be the best. It’s very strong against the U.S. dollar, it’s not all that strong against the Australian dollar or the New Zealand dollar yet.”

The Canadian currency, known as the loonie, has stayed above parity with the U.S. dollar for a week and recently traded at $1.0033. A loonie is worth NZ$1.3081 and A$1.0170.

Brown Brothers, founded in 1818, is the oldest closely held bank in the U.S., according to its website. Chandler, 49, has worked there since 2005.

Mark McCormick, a New York-based currency strategist at the firm, today said the bank’s fundamental view on the euro hasn’t changed since Trichet’s remarks.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.