| Analysts fine tune their Euro-Dollar forecasts - June bfinance rates and FX consensus |
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| 4.06.2006 | |
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Temporary inflation fears and turbulences on equity markets have made the Euro-Dollar a moving target, while consensus on rates has been left largely untouched from last month. According to bfinance's monthly rates and currency consensus, the average forecast of the Euro-Dollar jumps from 1.22 to 1.28 over a three-month horizon and from 1.24 to 1.30 over a six-month horizon. A handful of banks, among which Merrill Lynch, JP Morgan and SG, even expect the 1.30 barrier to be broken over that period. This spike in forecasting happens as Henry Paulson is succeeding John Snow as the new US Treasury Secretary, leading to much speculation as to what impact there will be on the dollar, if any. Former CEO of Goldman Sachs, Henry Paulson is a household name on Wall Street and succeeds two industrialists. At first sight, that should be a plus for the dollar, according to Lehman Brothers economists Charles Shioleno and Jim McCormick, who point out that the greenback usually performs better when managed by a Treasurer with a financial industry background. The new US Treasurer has already let it be known that he thinks growth is key in untangling the web of external and internal disequilibria. However, some of his past comments have shed a somewhat different light from what could be expected next; at the end of the day, he does not seem to have substantially different views from his predecessor's. Even if he has acknowledged that growth is a central feature, he has also claimed that currency parities had a strong role to play in the adjustment of external imbalances. He does not expect a brutal adjustment of the US dollar and seems to think that deficits will take much time to fade away. After all, Henry Paulson said in a recent interview to the German newsmagazine Der Spiegel that it was both in China's and in the US' interest that China invests in the dollar. According to Jim McCormick, It is unlikely that his stance significantly veers away from Snow's, who pleaded more for currency flexibility toward Asia, among others, than for a weak dollar. In other words, Lehman Brothers do not expect a weak-dollar policy, but rather bet on the continuation of the constructive dialogue with China as well as strong opposition to protectionist pressures in Washington. Over the short term, the future of the Euro-Dollar will rely heavily on the upcoming events on the European growth front, as well as the European Central Bank decisions. "If the ECB limits the increase of its refi rate to 3%, this will allow the Euro to stabilise and then start withdrawing from next fall, when concrete signs about a sluggish European economy will then be more pervasive. If the ECB starts to panic and steps up its refi rate to 3.50%, then the impact on growth will be such that the dollar will first weaken, but will then start to strengthen again. To put it simply, a stronger Euro will negatively affect the European economy, which should swiftly lead to its weakening", explains Marc Touati, chief economist at Natexis Banques Populaires. In the UK, analysts are stunningly consensual since few of them dare to forecast a hike over the next three or six months. It seems that a peak has been reached, and that soul-searching will soon start as to when the Bank of England will begin to trim its base rate. M.N. and J.L.  |
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