Euro Remains Lower After IMF Cuts Europe’s 2013 Forecast

By Masaki Kondo and Monami Yui - Oct 9, 2012 10:17 AM GMT+0800

 

The euro remained lower following a decline yesterday as the International Monetary Fund cut its growth forecast for the currency bloc and European leaders struggle to contain the region’s debt crisis.
The shared currency maintained a drop against the yen before data from Italy tomorrow that economists say will show the nation’s industrial production dropped by the most in more than two years. German Chancellor Angela Merkel visits Greece today for the first time since the crisis began in 2009.

“The euro is struggling to strengthen,” said Kengo Suzuki, a currency strategist in Tokyo at Mizuho Securities Co., a unit of Japan’s third-largest bank by market value. “The economic outlook is not bright in Europe.”
The euro was at $1.2982 as of 11:15 a.m. in Tokyo after losing 0.6 percent yesterday in New York to $1.2968. It bought 101.66 yen from 101.58 following a 1 percent drop, the biggest slide on a closing basis since July 20. The dollar was little changed at 78.31 yen.

The 17-country euro area economy will expand 0.2 percent in 2013, down from the projection of 0.7 percent three months ago, the Washington-based IMF said in its World Economic Outlook report today. The region’s economy will contract 0.4 percent this year, the fund forecast.
The world economy will grow 3.3 percent this year, the slowest pace since the 2009 recession and compared with the July forecast of 3.5 percent, the IMF said. The risk of a serious global slowdown is “alarmingly high,” the fund said.

Italy’s Production

Industrial production in Italy dropped 9.7 percent in August from a year earlier, according to the median estimate of economists in a Bloomberg News survey. That would be the biggest decline since October 2009. Italy is the euro area’s third- largest economy.

Finance ministers from all 27 nations in the European Union will convene in Luxembourg today. Ministers from the euro bloc yesterday declared the 500 billion-euro ($649 billion) European Stability Mechanism operational, while saying that Spain, the permanent rescue fund’s biggest potential near-term customer, isn’t on the verge of tapping it.

Greece, where the European debt crisis began, needs to find spending cuts to maintain access to 240 billion euros in rescue funds and is trying to reach an agreement with its official lenders to release the next payment of 31 billion euros. Luxembourg Prime Minister Jean-Claude Juncker told reporters yesterday he is “impressed” with the Greek government’s performance.

Trade Ranges

“The key focus will be on Spain and Greece and, while we expect positive progress to be made on both accounts, we do not expect that the event will provide headlines that deliver a major catalyst for the market,” Michael Sneyd, a currency strategist at BNP Paribas SA in London, wrote in an e-mailed note yesterday, saying of meetings of European financial chiefs. The euro-dollar may not “move substantially on the back of this week’s events and short-term investors are likely to continue to trade the ranges,” he wrote.
The world’s most-accurate foreign-exchange strategists say the dollar will strengthen even as the Federal Reserve debases it, unlike the previous two rounds of economic stimulus, when cash injections weakened the currency.

Fed Chairman Ben S. Bernanke’s $40 billion-a-month of bond purchases will leave a stronger currency in 2013, say nine of the 10 forecasters with the lowest margins of error in the six quarters ended Sept. 28 as measured by Bloomberg. Wells Fargo & Co. and Westpac Banking Corp., which tied for most-accurate, expect little damage from efforts to stimulate the economy and the so-called fiscal cliff of spending cuts and tax increases scheduled for next year.

Dollar Index

While the Dollar Index (DXY), which measures the currency against those of six major trading partners, fell 4.6 percent and 3.9 percent in the first two rounds of Fed stimulus that added $2.3 trillion to the banking system, this time will be different, forecasters say. Investors will demand the world’s reserve currency as U.S. growth outpaces its developed counterparts.

“If the U.S. economy keeps outperforming, then it shouldn’t cause the U.S. dollar much damage,” given that most of its trading partners are growing slowly or contracting, said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp. Monetary easing is only “a short-term negative for the U.S. dollar.”
Westpac, which matched Wells Fargo with a 3.34 percent margin of error in the Bloomberg analysis, expects the dollar to rally to $1.20 versus the euro by the third quarter of next year, from $1.3045 at the end of last week, and advance to 80 yen from 78.67. The Dollar Index was little changed at 79.545 today.

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net