The euro is predicted to extend its gains to near $1.50 against the dollar, buoyed by the interest rate differentials between the European Central Bank (ECB) and the Federal Reserve, said a report on Friday.
The level of rate differentials points to the euro grinding higher to $1.47 or even $1.50, WSJ reported, quoting Bilal Hafeez , a strategist with Deutsche Bank AG.
The bank previously forecast the euro to trade in the range of $1.25 and $1.40 against the greenback throughout this year.
Earlier on Friday, the euro fell against its major counterparts, as concerns over debt problems in eurozone got renewed, after Moody’s downgraded Ireland debt rating.
The ECB on last Thursday raised the interest rates by 25 points to 1.25 percent, its first rate hike since July 2008.
“Interest rate spreads remain a dominant theme, depressing the USD and supporting European currencies. Despite short-term volatility around central bank meetings, we expect these broad trends to continue in Q2, the Economy News reported, quoting a note from Standard Chartered on Wednesday.
Standard Chartered expects the US dollar to continue lower through second quarter this year, before finding more meaningful support in the second half as the Fed ends its QE2 programme.
The central banks in Europe and Asia excluding Japan are working towards normalizing monetary policy, which will boost their respective currencies to strengthen against the dollar.
Deutsche Bank AG noted that near-term picture for the single currency to remain fairly positive.
Valuations, positioning and the absence of capital inflows all suggest the bulk of gains are behind us,” the bank said.
Typically, the euro corrects by 10 percent once a 30 percent overvaluation is reached, Hafeez said.
However, the bank warns of risks to the euro by sovereign debt concerns in the region.
It is doubtful that the euro is the best placed to benefit, given the outstanding peripheral bond market issues, whose risks could pick up in 2012, the bank added.
German newspapers reported that EU experts estimate that Greece needs to clear away 40 percent to 50 percent of its debt, while German Finance Minister Schaeuble indicated that he is awaiting detailed analysis of Greek debt sustainability, said a note from RBC Capital Markets on Thursday.
The ECB Governing Council Member Yves Mersch said that he can’t exclude the possibility of a Eurozone member going insolvent.
“It’s not ruled out, but if you put it on the table as part of the solution right from the start you’re telling the markets they have a higher risk of investing in Eurozone bonds than in debt from other regions” Mersch said.
Analysts expect the single currency to get support from expectations over another rate hike by the ECB this year.
The ECB on Thursday maintained its hawkish stance, saying that it sees upside risks to price stability and will continue to monitor inflationary pressures very closely.
It is essential that the recent price developments do not give rise to broad-based inflationary pressures over the medium term, the ECB said.
ECB Governing Council member Mario Draghi said that monetary policy remains “accommodative” even after the ECB raised its benchmark rate last week for the first time in almost three years.