Euro Seen Capturing Currency Throne From Dollar Again in '18

(Bloomberg) -- After trouncing the dollar this year, the euro is set for a repeat performance in 2018, according to forecasters.

Buying the shared currency ranks among next year’s top trades as it’s set to get new momentum from the European Central Bank’s gradual unwind of ultra-loose monetary policy. The euro surged 12 percent for the best Group-of-10 performance against the dollar this year. ING Bank NV is predicting a gain of about 10 percent in 2018.

The median estimate of strategists surveyed by Bloomberg has the euro climbing to $1.21 by the fourth quarter while options put the odds of attaining that level at more than 80 percent by then. Another bullish indicator can be found in so-called risk reversals, where calls cost more than puts.

The focus on a more hawkish ECB dominates thinking among bulls, including Canadian Imperial Bank of Commerce. CIBC and ING had the second- and third-best forecast scores among banks and financial firms in a Bloomberg survey for the third quarter of 2017.

ING’s chief European rates strategist Petr Krpata expects currency markets to price in a deposit rate of zero long before the ECB moves.

“That will drive up the euro,” Krpata said.

The central bank’s deposit rate, now at minus 0.4 percent, has depressed the euro since going negative in 2014.

“Rolling back the deposit rate is going to be significant, because a number of central banks and sovereigns have significantly reduced euro holdings because of those negative rates,” said Jeremy Stretch, CIBC’s head of Group-of-10 currency strategy. 

Still, markets aren’t currently pricing in an interest-rate increase by the ECB until at least 2019, with the central bank’s asset-purchase program set to run until at least September next year. There could also be disappointment for bulls should eurozone inflation continue to undershoot the ECB’s goal and mute hawkish pronouncements by the central bank.

The euro fluctuated after ECB President Mario Draghi signaled that the euro-area economy isn’t yet strong enough to warrant weaning off monetary stimulus. It edged 0.2 percent lower to $1.18 by 4:08 p.m. in Frankfurt.

The dollar’s pain could be the euro’s gain as the greenback is caught in the crossfire of infighting among lawmakers over taxes and unraveling optimism about fiscal easing. That leaves the dollar more vulnerable should the Fed embark on a slower-than-expected tightening path, according to London-based broker Argentex LLP.

“The euro has got greater potential to outperform the U.S. dollar,” said John Goldie, a currency dealer at Argentex. “The Fed has been raising rates for the last three years but the markets have been a little disappointed with the rate of hikes. I wouldn’t be surprised to see them slow down.”

To contact the reporters on this story: Todd White in Madrid at twhite2@bloomberg.net, Anooja Debnath in London at adebnath@bloomberg.net.

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Cecile Gutscher, Sid Verma

©2017 Bloomberg L.P.