Euro Will Fall 10% Versus Dollar in 3 Months, UBS, Barclays Say

By Garfield Reynolds and Candice Zachariahs

Dec. 19 (Bloomberg) -- The euro will fall about 10 percent against the dollar in the next three months as demand for safety and economic weakness in Europe boosts demand for the U.S. currency, UBS AG and Barclays Capital said.

The 15-nation euro will weaken to $1.25 as the European Central Bank follows the Federal Reserve in lowering its benchmark interest rate over the next six months, UBS analysts wrote yesterday in a note to clients. UBS, the world’s second- largest currency trader, also said the euro is likely to fall against the yen. Barclays forecasts the euro will weaken to $1.30 in three months.

“Global rates are converging towards zero with deflation risks looming,” Benedikt Germanier and Brian Kim, based in Stamford, Connecticut, wrote in the report. “Wanted in such an environment is safety, liquidity and a store of value. The U.S. dollar and Japanese yen meet those criteria.”

The euro traded at $1.4254 as of 10:54 a.m. in Tokyo, after touching a three-month high of $1.4719 yesterday. The currency has gained 6.9 percent this week, the most since its 1999 debut. The currency traded at 127.35 yen from 127.44 yesterday.

The European single currency rose 6.8 percent against the dollar this week after the Fed on Dec. 16 cut its interest rate target to a range of zero to 0.25 percent, the lowest among the industrialized economies. The Fed said its key rate would stay at “exceptionally low levels” for some time and it would “employ all available tools” to ensure sustainable growth.

The euro’s recent gains were a disadvantage to the region’s exporters, French Finance Minister Christine Lagarde said yesterday. Business confidence in Germany, Europe’s largest economy, dropped to the lowest since 1982, the Ifo Institute’s survey of 7,000 executives showed yesterday.

“The European economy is in very poor condition to deal with the recent appreciation” of the euro, Steven Englander, a currency strategist at Barclays in New York, wrote in a research report yesterday. “The outlook for Russia and Eastern Europe remains the most important downside risk to the euro.”

To contact the reporter on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net