! How High Can the Euro Go? Analysts Raise Targets
By JONATHAN FUERBRINGER
How far will the dollar fall and the euro rise? A lot further than many forecasters thought just a few months ago, or even a few weeks ago.
The dollar's 8.7 percent plunge against the euro since March 21 has already made existing predictions for 12 months from now obsolete. Some forecasts see the possibility of the dollar's falling close to levels not seen since the mid-1990's, when the American currency dropped to record lows against European currencies like the German mark that at the time were strong.
Just a month ago, the average of the predictions gathered by Consensus Economics, a research firm in London, was that the euro would rise to a value of $1.0950 against the dollar by April 2004. But the euro moved above $1.10 before the end of April and was trading around $1.15 today. Even the highest euro forecast in that April survey ? $1.23 ? seems too low now.
"I'm not sure anything can stop the dollar fall for the foreseeable future," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn. "I just don't see foreign investors stepping up to allocate growing amounts to the United States, so the dollar has to give."
The factors pulling the dollar lower include the United States' $500 billion current account deficit with the rest of the world, American interest rates that are lower than those in many other countries, lingering doubts about the revival of the American economy and worries about low inflation turning into deflation.
In addition, foreign central banks ? including the European Central Bank ? and finance ministers, who know stronger local currencies could impede their own economic recoveries, have yet to protest against the negative impact of a falling dollar.
If Mr. Gilmore was asked for a new forecast for the euro, he said he would lift his prediction to $1.30 by year's end, a 10-cent increase.
A look at two ways that analysts predict a currency's path gives a hint at how some of these higher forecasts for the euro are reached.
C. Fred Bergsten, director of the Institute for International Economics in Washington, bases his assessment on figuring how far the dollar needs to fall to bring the nation's current account deficit, which includes profits on investments as well as trade in goods and services, to a sustainable level.
Mr. Bergsten believes a current account deficit around $250 billion is sustainable because it does not threaten to disrupt the economy. Each percentage point decline in the value of the dollar in the Federal Reserve's dollar index of the United States' major trading partners should reduce the current account deficit over time by about $10 billion to $15 billion.
The deficit would shrink eventually because a lower dollar discourages imports by making them more expensive and increases American exports by making them more competitive abroad.
So over time, Mr. Bergsten said, the dollar would need to fall roughly 20 percent to 25 percent in value to reduce the current account deficit to a sustainable level. After factoring in the dollar decline that has already occurred, Mr. Bergsten said the dollar still needs to fall 10 percent to 15 percent more against the euro and to stay around that level. Such a move would bring the euro to a value of $1.2650 to $1.3225.
Paul Meggyesi, a currency strategist at J. P. Morgan, said analysts were trying to figure out how far the dollar is likely to fall below what is called fair value against the euro. Determining the fair value for the dollar and the euro is like choosing the point when stocks are fairly valued; that is, not too high for the current economic environment and not too low. Like stocks, the dollar can be overvalued, as it has been, or undervalued, for long periods.
Mr. Meggyesi said that based on the short history of dollar trading since the early 1970's, undervaluations of the dollar can be as much as 5 percent to 10 percent. With the fair value of the dollar, calculated by J. P. Morgan, equal to a euro worth $1.10 to $1.15, the dollar is already in the undervalued range.
With fair value pegged at $1.15, an additional 5 percent to 10 percent decline would bring the trading range for the dollar to a euro valued at $1.2075 to $1.2650.
Both these approaches and the forecast of Mr. Gilmore bring the dollar well below its value against the euro when this multinational currency made its debut on Jan. 1, 1999. The first-day value of the euro was $1.1667.
And at the $1.3225 level for the euro, the dollar could be called weak as it would then be within striking distance of the post-1973 low of the dollar against the West German mark, at the time the leading European currency. The mark's level at that dollar low translates into a euro of $1.4450.
Copyright 2003 The New York Times Company
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