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Euro may weaken further before strengthening Back  
The euro is likely to weaken in short-term, particularly against the dollar.
Enda Coll, head of institutional treasury, Anglo Irish Bank
The prospects for the euro have been seriously harmed due to the massive liquidation of long positions by medium-term investors in August and in one week alone the euro lost nearly 4 per cent of its value against the dollar. Sentiment towards the euro has been damaged by the sell-off and also by recent weak German and French GDP figures.

It is now apparent that comparative growth rates in the US will exceed those of the Euro-zone going forward. This is likely to lead to renewed weakness in the euro in the months ahead particularly against the dollar. The •/$ is likely to reach 1.05 towards the end of 2003 and could possibly even touch 1.02, although this weakness is not expected to last going into 2004, as in the longer term the US current account and budget deficits will weigh on the US currency. This is likely to mean that the euro will trade back towards 1.10/1.15 by the end of 2004.

Growth in Japan is likely to be relatively robust in 2003 compared to previous years. This was evidenced by the surprisingly strong second quarter growth figures and is likely to support the yen for the remainder of 2003.The yen is also likely to benefit from global investor funds betting on the ‘Japan recovery story’. The all round euro weakness is likely to see the •/Y trade down to 122 towards the end of 2003, However as the euro recovers in 2004, we are likely to see this currency pair trade back towards the 135/140 level.

The UK economy is well placed to benefit from any recovery in the global economy and this is likely to ensure that sterling will benefit from any further dollar gains against the euro. We are likely to see sterling strengthen to 0.68 by the end of 2003.

Niall Dunne
One question is currently dominating the forex market’s thinking: will the euro’s slide against the dollar and yen continue, or will the recent fall prove to be a temporary correction in a longer-term Euro appreciation?

The key question that must be asked is will American economic data releases continue to beat expectations, or will we see in time that the recent strength of the data has largely been driven by extraordinarily stimulative monetary and fiscal stimuli? This improvement in sentiment has ironically led to an increase in intermediate and long term US interest rates, contrary to the Fed’s expressed intention of keeping rates as low as possible for as long as possible.

Nevertheless, •/$ could well dip toward the 1.07 level in the near future; but if •/$ can reverse the recent trend ahead of the 1.05 level, I will hold with my call that sees 2003 ending with a weaker dollar, trading once more in the 1.13-1.15 range. I feel that data coming into year-end will show that the US economy is continuing to expand, but not at the rapid pace that we are currently seeing. And then the burden of the twin deficits (America’s federal budget deficit and its current account deficit) both point to a resumption of dollar weakness entering into 2004.

But American growth prospects will be maximised by a weaker dollar, and when the stimulative effects of tax cuts and historically low interest rates fade, America will want the dollar to weaken again to drive its recovery - particularly in an election year, where the White House will want to maximise growth, irrespective of cost.

The outlook for the UK is broadly similar, since Britain is obviously set to outpace the Eurozone economically, thanks in no small part to the weaker pound sterling. We know that the Bank of England wants a weaker pound to reduce Britain’s balance of trade deficit, and a weaker pound will also aid British industry by boosting demand for British exports and reducing demand inside Britain for foreign imports. I see no reason to expect that the Bank of England won’t achieve its goal of keeping sterling at or below current levels.

Dan McLaughlin
The euro benefited in 2002 and the early part of 2003 from a decline in risk related flows into equities and foreign direct investment (FDI), which hurt the dolllar, and a rise in bond flows attracted by the relatively high yields on offer in Europe.

Japanese inflows were a particular support but the turn of the economic cycle has prompted heavy selling of bonds by Japanese investors which has pushed the single currency through some important chart points against the dollar and the yen. The break of $1.1059 was particularly significant and opens the way to $1.05 and parity.

The dollar is also benefiting from a rise in investors’ risk appetite as the US will likely attract more than its share of equity related flows. Sterling may well trade in a 0.69 to 0.71 range against the euro, anchored to some degree by the prospect of EMU entry in the future at 0.73 pence

Alan McQuaid
The secular outlook is bearish for the dollar given the widening US current account deficit. In the short-term, the outlook depends on how alluring a rising American equity market is to global investors.. The euro and pound have borne the brunt of the dollar’s decline over the past year and they should continue to move higher over the medium-term. The Asian currencies have so far avoided appreciation against the dollar because of massive intervention by their respective governments.

The Japanese economy is starting to gain some modest growth momentum that will be augmented by the global upturn. Historically, the yen has been a very pro-cyclical currency, rising and falling with domestic exports and the global business cycle. The Bank of Japan has spent more than $50bn in recent months in order to hold the yen steady against the dollar, but the cost of intervention could prove overwhelming once export growth picks up, especially if a rising stock market continues to attract foreign capital inflows. In such circumstances, one could easily see the yen making a decisive break towards 100-110 dollar range over the next six months or so.
The bottom line is that the dollar will remain under pressure over the next twelve months and its decline will ultimately spread to incorporate Asian currencies as well. As regards sterling, relatively high short-term interest rates should continue to support the pound over the remainder of 2003 and into 2004. The pound should strengthen versus the dollar but fall versus the euro, with the possibility of an EMU referendum still hanging over the UK currency.

Oliver Mangan
The strengthening of the US economy, recovering stock markets and abating geopolitical tensions have seen the dollar recover ground against the euro over the summer months. Critical for a further rise in the dollar is that the upswing in the US economy proves sustained, as we think likely.

The continuing poor growth performance of the Eurozone economy is likely to remain a dampener on the euro. The gains made by the euro in 2002 and early 2003 largely reflected dollar weakness more than anything else. Most of the factors responsible for this dollar weakness have now abated.

Overall, we feel that the brighter economic prospects for the US will boost capital inflows pushing the •/$ rate back to 1.03 by mid 2004. This should help sterling to move modestly higher against the euro, especially if UK membership of the single currency is put on the long finger.
Concerns, though, remain about the US currency. Renewed dollar weakness could become evident again later in 2004, especially if the current account deficit continues to rise. By this time also, the Eurozone economy should be on a stronger growth path. A possible revaluation of the Chinese yuan could also pressurise the dollar. Thus, we look for the euro to rise modestly against the dollar in the second half of 2004.

Austin Hughes
I think the dollar will weaken in the next year or two as concerns grow about the size of budget and trade deficits in the States. The improvement in the US economy now underway is largely the product of a massive budget and interest rate stimulus. Unlike the late 1990s ‘new economy’, these ‘old’ sources of growth will not make US assets particularly attractive to global investors. Instead, the build-up in overseas claims on the US will threaten to push the dollar lower.

The scale of the dollar decline should be tempered by lacklustre economic performances elsewhere. Certainly, the euro area economy will be slow to build domestic momentum and questions about the appetite for much needed structural reform will also limit global demand for the single currency. However, there is undoubtedly scope for improved economic management, which, if communicated more clearly by Mr. Trichet, should help the euro on FX markets.

I think the Japanese Ministry of Finance will continue to try and manage the Yen in a manner that prevents the Japanese currency moving in a fashion that might extinguish a still tentative recovery. Perhaps one of the bigger stories of next year could be sterling weakness. We think a debt burdened UK Consumer and a poorer budgetary position will prompt a sub-par UK economic performance. If this is the case, our forecasts could be much too cautious.

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