Euro dollar forecast – euro still gaining

In a typical euro dollar forecast today, the euro is expected to gain further over the short-term, while the dollar is likely to eventually rally later on.

The euro continues climbing, reaching a near-all-year high of $1.377 against the dollar on Tuesday 10th December, and has risen 4.7% against a basked of currencies so far this year.

The Euro has been appreciating for six consecutive days and today reached a six-week high. There are expectations of a Eurozone banking union soon. Most European analysts believe the US Federal Reserve needs more good news on the US economy before reducing its stimulus package. In the US opinions are changing rapidly. How much more good news do they need?

Since the beginning of July this year, the euro has gained 8% against the dollar, even though predictions say that monetary policy between the US Federal Reserve and European Central Bank (ECB) are set to diverge.

The US Federal Reserve’s (Fed’s) expected tapering of its $85 billion per month bond-buying stimulus program will likely happen sooner than later, American economists are starting to say, as all signs are increasingly indicating that the US economy is gathering steam.

Add to this the ECB’s likelihood of opting for even more monetary loosening and we see all the ingredients coming together for a stronger dollar. However, it will not happen soon.

Euro dollar forecast not so simple

Scaling back on the stimulus program does not necessarily mean the Feds will raise interest rates, so US market analysts keep saying in growing numbers. At 0.3%, US yields are low and are likely to stay like that. Eurozone members’ state bond yields, on the other hand, have been rising, especially two-year German Bund yields.

Although some ingredients of higher dollar yields are there, investors are not feeling the attraction.

The Fed’s balance sheet will still be expanding when it reduces its bond purchases. In Europe, however, the ECB’s balance sheet has been contracting since the Q3 2012, suggesting tighter conditions in the euro area.

The Wall Street Journal quotes ING Bank, “banks are willing to pay up to get their hands on euros, for the first time since 2008.”

European stocks and bonds are attracting investors. There were record capital flows into European funds in October. The lure of higher yields in southern European government bonds is growing, and will continue to to do so well into next year.

At some point, the strength of the US economy and the relative weakness of the Eurozone one will force the Feds and the ECB to diverge completely. At that point the dollar could shoot up. This is unlikely to occur soon.

EU finance ministers have met in Brussels and are very close to an agreement on a plan to form an agency with the responsibility of shutting down Eurozone banks and sharing the costs. This is a vital measure  to protect the Eurozone against future debt crises.

Reuters quotes Sireen Harajli, currency strategist at Mizuho Bank Ltd in New York, who said “There’s some expectation that a deal may be reached before year-end, and that is supportive of the euro.”

Euro dollar forecast – what are people saying?

Euro slide – According to short-term estimates by BNP Paribas, the euro is overvalued and should slide over the next few weeks.

Short-term dollar slide FX Empire says there is no compelling data to support the euro, but it continues to climb. The Fed’s Open Market Committee meets on December 17-18th. Investors do not expect any announcement regarding reducing the stimulus package until next year. In other words, the dollar is unlikely to rally over the short term.

Tapering in 2013 unlikelyA Bloomberg survey of economists on December 6th found that 34% believe the Fed’s stimulus program tapering will begin at its December 17-18th meeting, compared to 17% on November 8th. This would result in an earlier dollar rally. In other words, a growing number of economists believe the Feds will start the taper this year, however, they are still a minority.

December – nothing but good news about the US economy

Q3 US GDP expanded by 3.6% (annualized), beating all predictions, and the US trade gap shrank by 5.4%, to $40.6 billion in October from $43 billion in September.

Euro dollar forecasts – potential ‘gremlins’

On both sides of the Atlantic there are economic and political factors which have the potential to disrupt markets and turn all predictions on their heads.

American brinkmanship – the US Congress is filled with politicians who hate each other more than they love their country. A government shutdown and/or an impasse on raising the debt ceiling could seriously undermine the dollar.

Southern Eurozone Members – the problems in Greece, Portugal and Spain may not be over. At any moment one them could fall into a crisis that would trigger a run on the euro.