POLL-Euro seen firming in first few months of life
09:12 a.m. Jun 03, 1998 Eastern
By David Stamp
LONDON, June 3 (Reuters) - The euro is likely to firm against the dollar
in the first few months of its life as the ''Euroland'' economy revives
and the U.S. slows, according to a Reuters poll released on Wednesday.
But the new currency may have a choppy ride in its early stages as not
only the European Central Bank (ECB) but also the entire monetary union
tries to establish its credibility, analysts in leading financial
centres said.
Reuters monthly foreign exchange poll, in which 39 analysts predicted
the euro's exchange rate, produced a median forecast for the new
currency of $1.13 on January 4, 1999 -- its first trading day. The Ecu
-- which will be switched over to the euro on a one-for-one basis -- was
trading at around $1.11 on Wednesday.
Thereafter analysts saw the euro climbing to $1.15 a year from now, or
five months after the launch of economic and monetary union. The poll
was taken on June 1 and 2.
Much has been said about how the ECB, which held its first executive
board meeting this week, may need to establish its anti-inflation
credentials by raising interest rates in the first few months of EMU.
But some respondents based their forecasts more on the relative
performances of the U.S. and continental European economies.
''There's a cyclical issue between the U.S. and Europe. The U.S. economy
should slow down and that of Europe should speed up again,'' said
Michael Wallace, European manager of foreign exchange analysis at
Standard and Poor's MMS in London.
Monetary tightening is likely to happen even before EMU starts in the
core countries led by Germany. Financial markets widely expect the
Bundesbank to raise German interest rates as the 11 founder members seek
to converge before the EMU launch.
Opinions are divided over when the German central bank will move. Some
expect a rate rise soon but Wallace forecast it would come later in the
year as the Bundesbank pressured peripheral countries with higher rates,
such as Ireland and Spain, to lower their rates for convergence. He saw
the German repo rate rising to 3.6 percent from 3.3 now.
Wallace, who forecast the euro at $1.15 at its launch and $1.18 a year
from now, said that the ECB's reputation was not the only issue at
stake. ''It will take some time to establish credibility, in broad terms
for the project itself, not just the ECB,'' he said.
A key issue is the ECB's relationship with the Euro-11 council,
comprising finance ministers from the launch countries.
Markets are watching for any political meddling in monetary policy, even
though the ECB is officially independent and its executive board is
packed with anti-inflation hawks.
With EMU uncertainties lingering, the first weeks of euro trading may be
volatile. ''At the launch it could be a bit choppy,'' said Wallace.
Not all respondents agreed the euro would rise from the launch and CSFB
forecast it would slip from $1.08 at the launch to $1.05 a year from
now.
''The view is that structurally the dollar is the strong currency in the
world economy and that is going to persist for the foreseeable future,''
said Sean Shepley, currency strategist at CSFB.
He cited the fact that the United States had made more progress towards
balancing its budget than European countries, while U.S. companies were
more competitive than their European counterparts.
Europe may also be hit more by the crises in emerging markets, notably
Asia, than the United States because it is relying more on exports to
drive economic growth rather than domestic demand.
Shepley also questioned whether the ECB would raise rates purely to show
its credibility. ''That's only correct if the macroeconomic
circumstances justify it,'' said Shepley. ''Should the ECB be running
monetary policy to run the European economy into the ground?''
Europe still had plenty of potential to grow without inflation becoming
a problem, he said, adding that the bias was for European rates to stay
low.
But he agreed that the EMU launch would be an interesting time. ''There
will be quite a bit of choppiness in the early period,'' he said.
Copyright 1998 Reuters Limited. |
