Don’t relax just yet, euro-dollar parity’s still on its way

The euro hung onto gains on Wednesday after the U.S. dollar tumbled against the single currency on Tuesday, following a spike in German and U.S. government bond yields which rattled markets and pushed investors to reconsider their short bets on the euro.

Having touched lows of around $1.04 in March after the launch of the European Central Bank’s massive trillion-euro bond-buying program, the euro has climbed against the dollar as European government bond yields have edged higher and a resolution to debt talks between Greece and the euro zone have proven elusive.

But longer-term, fund managers invested in U.S. markets are still expecting the dollar to return to strength from current levels of around $1.12, with euro dollar parity, or a one-to-one exchange rate, still very much on the cards.

While the ECB has only just starting its quantitative easing program, the U.S. Federal Reserve is in the process of trying to wind its down, a move which has helped support the year-long rally in the dollar against a basket of currencies.

But as the Fed is expected to hike rates later this year, with most analysts eyeing September, some investors are anticipating further dollar strengthening.

Looking at historical moves in the dollar, the currency tends to move over three- of four-year cycles, where 20-30 percent appreciation is normal. All this points to the recent 15 percent appreciation in dollar against a number of other currencies has more room to run, according to chief investment officer of real return and asset allocation at PIMCO, Mihir Worah.

“We think there is another 5 to 10 percent appreciation left in the dollar. Clearly if the dollar moves too fast, it impacts what the Federal Reserve does, but to put numbers on it – we see parity versus euro and 125 versus the yen. So another 5 or 7 percent from here wouldn’t change what the Fed is likely to do from here,” Worah said, speaking at the Morningstar investment conference in London.

In light of the euro’s recent strength, a number of analysts have reconsidered the consensus long dollar, short euro trade after some weaker economic data from the U.S. pushed back expectations of a Fed rate hike.

CNBC

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