UBS Says Euro to Drop, Advises Selling Against Dollar

By Bo Nielsen

Jan. 13 (Bloomberg) -- The euro will fall against the dollar as the European Central Bank “comes under pressure” to cut interest rates and risk-averse investors seek the safety of U.S. Treasuries, UBS AG said.

“The trend in the euro remains down,” UBS analysts led by Mansoor Mohi-uddin, the Zurich-based chief strategist, wrote in a client note dated yesterday. “Going forward, falling inflation expectations will help the ECB shift to a more dovish monetary policy, keeping the currency in a broad downtrend.”

The ECB will probably reduce its main rate to 2 percent from 2.5 percent on Jan. 15, according to the median estimate of 59 economists in a Bloomberg survey.

Investors should sell the euro against the dollar with a target of $1.2850 and end the trade if the euro reaches 1.3850, the analysts said. The euro was at $1.3281 as of 10:02 a.m. in London. It will trade at $1.20 by the end of the year, according to a UBS forecast.

The euro also probably will decline against the British pound, UBS said. The bank maintained its three-month forecast of 86 pence. The U.K. currency recently was at 90.58 pence per euro, weakening for a second day.

“With the ECB under pressure to ease interest rates more aggressively, euro-pound should follow euro-Swiss franc, euro- Norwegian krone and euro-Swedish krona lower from their overbought levels at the end of last year,” the analysts wrote.

Dollar-Yen

The pound sank 23 percent versus the euro in 2008, weakening to a record 98.03 pence per euro on Dec. 30. The krone dropped 18 percent and touched an all-time low on Dec. 24. The Swedish krona fell 14 percent and also reached its weakest ever on Dec. 24.

“If the ECB stays on hold this week or only cuts 25 basis points, investors are likely to expect further action next month,” according to the UBS report. “Thus the euro is likely to remain a sell on rallies against both the dollar and the yen.”

UBS also reduced its three-month dollar-yen forecast to 90 from 95. The U.S. currency bought 88.94 yen, from 89.22 yesterday.

The euro-Swiss franc rate will reach 1.4900 in one month, according to the report. The European common currency weakened to 1.4838 francs, from 1.4898.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net