Dollar to Rise to Parity With Euro in 2009, State Street Says

By Candice Zachariahs

Oct. 30 (Bloomberg) -- The dollar will rise to parity with the euro in 2009 as the European Central Bank cuts interest rates and market volatility prompts U.S. investors to repatriate funds and hedge their currency risks, State Street Global Markets said.

``One of the calls we have been making recently is that there's a very strong possibility that euro-dollar could reach parity,'' Carlin Doyle, a currency strategist in London at State Street Global Markets, said in a telephone interview today.

The dollar will also appreciate as U.S. investors, who hold $5 trillion of foreign equities, take home some of their investments, according to a research note by State Street dated Oct. 24. The ECB will reduce its benchmark rate to 3 percent from 3.75 percent by the end of 2009, the median forecast of 16 economists surveyed by Bloomberg News shows.

The U.S. currency traded at $1.3204 per euro at 7:54 a.m. in London, from $1.2963 yesterday in New York. The dollar has gained more than 10 percent this year, the third-biggest advance among the world's 16 most-active currencies.

The median forecast among 34 finance companies surveyed by Bloomberg is for a rate of $1.3000.

The greenback's appreciation since July has been chiefly driven by ``the repatriation of equity capital back into the U.S.,'' wrote Michael Metcalfe, head of macro strategy at State Street Global in London. ``If repatriation persists this would imply euro-dollar returning to parity by the end of March.''

The dollar has gained 7.8 percent since the collapse of Lehman Brothers Holdings Inc. on Sept. 15. Since then, the VIX volatility index, a Chicago Board Options Exchange gauge reflecting the outlook for stock market price changes and a barometer of risk aversion, rose to a record close of 80.06 on Oct. 27 on concern that global growth will slow.

Given the increased volatility in currency and equity markets, ``the need for U.S. equity managers to think about their currency risk in a more systematic way is rising fast,'' wrote Metcalfe. ``Following both repatriation and hedging flows at present, suggests that U.S. dollar strength is set to continue.''

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net