Euro May Fall 15% Against Dollar as Lending Dries Up, BNP Says

By Candice Zachariahs

Jan. 21 (Bloomberg) -- The euro may fall 15 percent against the dollar by mid-year as European banks restrict lending and sovereign bond spreads widen due to the deepening global economic slowdown, BNP Paribas SA said.

The 16-nation currency may “undershoot” the bank’s forecasts and touch $1.10 in the second quarter, a level last seen in September 2003, said Hans-Guenter Redeker, global head of foreign-exchange strategy at France’s largest bank. BNP, which was the most accurate currency forecaster in a 2007 Bloomberg survey, expects the euro to trade at $1.30 by March 31, $1.20 by June 30 and $1.24 by year-end.

“The euro is going to come under further pressure” as the region is likely to face “significant economic stress,” London-based Redeker said during a presentation in Sydney.

The currency rose 0.5 percent to $1.2973 as of 2:44 p.m. in Tokyo, paring its loss this year to 7.1 percent. The euro touched $1.2330 on Oct. 28, the weakest level since April 2006.

The European currency is heading for its third monthly loss after Standard & Poor’s downgraded the sovereign credit ratings of Spain and Greece and lowered its outlook for Ireland to negative as government measures to stem the global financial crisis widen budget deficits.

The difference between the interest rates that Greece, Ireland and Portugal must pay investors to borrow for 10 years and the rate Germany pays widened yesterday to the most since the introduction of the euro in 1999.

European policy makers are “operating behind the curve,” Redeker said. The European Central Bank must ease monetary conditions or “risk the stability of Europe.”

The euro may also weaken as Asian investors who have bought the currency as the “anti-dollar” begin to sell, he said.

The ECB’s benchmark rate is at 2 percent, compared with 0.1 percent in Japan and as low as zero in the U.S. The European Commission on Jan. 19 projected the 16-nation economy would shrink 1.9 percent this year.

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