Euro Declines Against Dollar Raising Parity Expectations Again

The recent sustained decline of the euro against the dollar has renewed speculation that the single currency could reach parity with the dollar soon. Over the last two weeks, the euro has dropped 4 percent against the dollar hitting $1.06, which is the lowest in a 12 month period. Recent indications from the European Central Bank suggest that it is not likely to shift from its current monetary policy which has resulted in negative interest rates and includes a massive bond-buying stimulus program.

However, several countries in the Euro zone are facing elections in the near future where parties touting populist agendas may come in to power, causing increased adoption of policies that could hamper long term growth.

Global banking major Citibank has said in a note that after the electoral win of Donald Trump in the United States, it was doing a complete U-turn in its forecast for dollar-euro rates. It now predicts that the euro will drop to 98 cents in the next 6 months to a year.

Adnan Akant, head of currencies at asset management firm Fischer Francis Trees & Watts has said that the likely divergence of U.S. polices from the rest of the world is sure have a positive impact on the value of the dollar. Goldman Sachs expects the U.S. Federal Reserve to raise interests this December and a further three times next year while the ECB will continue with its stimulus program till end of 2017.

Akant is predicting the parity between the two currencies to occur in a short while given that the difference between them is just 7-8 percent. Experts believe the drop in value of euro could benefit the Eurozone. A cheaper currency would be mean more competitive exports and heighten inflation in the region. It will however also mean a rise in import costs including oil which is paid in dollars.

From its launch in 1999 till 2002, the euro was largely below parity as the U.S economy was the stronger of the two during this period. Post 2002, the currency has been trading higher, climbing to a high of $1.60 in 2008 when the financial crisis hit the U.S market. Some analysts however don’t believe the parity is on the cards given the strengthening of Eurozone’s economy, just like it did not happen in late 2015 when it was widely expected.

In a statement Geoffrey Yu, head U.K. investment office at UBS Wealth Management said,

If you just look at how the eurozone has performed in terms of data, things look better than they did the last time people were gunning for parity.

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