Euro to Post Brief Rally to $1.40 as Fed Buys Bonds, UBS Says

By Candice Zachariahs

March 19 (Bloomberg) -- The euro may surge to $1.40 for the first time in 11 weeks on the European Central Bank’s reluctance to match the Federal Reserve in buying government debt, before falling toward $1.20 later this year, UBS AG said.

The euro yesterday rose the most against the U.S. dollar in almost nine years and the Standard & Poor’s 500 index jumped to a one-month high after the Fed said it will purchase $300 billion of longer-term Treasuries. The euro will likely fall back toward $1.20 once the ECB is forced to follow the Fed’s lead, wrote Mansoor Mohi-Uddin, managing director of currency strategy in Zurich at UBS, in a note yesterday.

“Expect the euro to keep overshooting for now with euro- dollar back toward $1.40,” Mohi-Uddin wrote. “The return of investor risk aversion and all the major central banks embracing quantitative easing will cause safe haven seeking flows to resume and push the U.S. dollar higher back toward its long-term fair value of $1.20 this year.”

The euro traded at $1.3493 as of 8:37 a.m. in Tokyo from $1.3474 in New York yesterday, when it rose as much as 3.7 percent, its biggest intra-day advance since September 2000.

The European Central Bank is “studying at the moment whether to take complementary measures that won’t necessarily be the same as” other central banks, ECB President Jean-Claude Trichet said March 18. The bank’s benchmark rate is at 1.5 percent compared with 0.1 percent in Japan and as low as zero in the U.S.

Fed officials unanimously voted to expand the bank’s balance sheet by as much as $1.15 trillion and said they may broaden a program aimed at boosting consumer loans to include other assets, the statement following yesterday’s Federal Open Market Committee meeting showed.

“Our European economics team expect the ECB will now have to react rapidly to the Fed’s monetization of government debt by also embracing quantitative easing with an announcement likely as early as the ECB’s next meeting at the start of April,” Mohi-Uddin wrote.

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