Euro to retain gains made vs dollar in next 12 months

LONDON: The euro should hold on to recent gains made against the dollar over the next 12 months, underpinned by higher interest rates while the currency union's sovereign debt crisis continues to rage, a Reuters poll showed on Wednesday, July 6.

Conducted largely before Wednesday's shock credit rating downgrade of Portugal to junk status, the monthly survey of around 50 strategists showed the euro weakening slightly in a year's time to around $1.39 from $1.43 currently.

That was roughly unchanged from last month's poll.

While the euro fell on Wednesday after the Portuguese downgrade, it has gained more than 7 percent against the dollar this year. A widely expected interest rate hike from the European Central Bank on Thursday should lend it support.

The ECB has been the first of the "big four" central banks -- also including the U.S. Federal Reserve, the Bank of England and the Bank of Japan -- to hike interest rates since the Great Recession, and looks set to keep doing so over the next 18 months.

Economists polled by Reuters do not see the Fed hiking interest rates until at least the first quarter of next year -- a scenario that will only emphasize the euro's yield advantage.

"Euro/dollar will have the tendency to go somewhat higher," said Sebastien Galy of Societe Generale, the most accurate one-month forecaster in the June poll.

"(It) is not because we believe the euro is a great currency, but we do believe that the dollar is fundamentally weak and will continue to be weaker as the global economy rebalances."

Twenty-nine out of 52 respondents see the euro heading higher over the next month compared to Tuesday's close of $1.4422, with the median suggesting a rise to $1.45 in a month.

While the one-, three-, six- and 12-month forecast horizons showed a fairly flat trajectory for the euro, Galy warned that the euro zone's shifting fiscal situation would result in hits to the euro from time to time.

The poll showed the euro slipping to $1.42 in three months and six months.

At 12.3 percent, the euro-dollar pair showed the highest volatility last month compared with sterling and yen. Calculations derived from the standard deviation of forecasts suggests euro volatility will be just as high in the next few weeks.

Against sterling, median forecasts show the euro at 90 pence in a month, 88 pence in six months and 86 pence in a year, little changed from forecasts in June's poll. The euro was worth around 90 pence earlier on Wednesday.

Bank of England interest rates are expected to stay at their record low of 0.5 percent until the fourth quarter of this year, which would open up a big differential with the equivalent euro zone rate, expected to rise to 1.5 percent on Thursday.

But with Greece in a critical situation and the fiscal outlook in Ireland, Portugal and Spain far from assured, sterling stands to benefit even though the UK economic outlook seems fairly grim.

Twenty-six analysts who answered an extra question said they see the dollar index .DXY at around 76.9 by year-end, not too far removed from Wednesday's levels around 75.1. - Reuters