The euro is on course to hit parity with the dollar for the first time in more than 14 years, helping the eurozone maintain its recovery by making exports more competitive, according to a Financial Times poll of economists.
More than two-thirds of the 28 experts polled said the dollar would attain the same value as the euro during the course of the year, buoyed by higher US interest rates, in accordance with president-elect Donald Trump’s plans to shift from monetary to fiscal stimulus.
The economists expressed relative confidence that after a year of upsets — including Mr Trump’s election and Britain’s vote to leave the EU — the eurozone would avoid major shocks.
But they also worried about Mr Trump’s policies once in office and what they saw as low-probability, high-risk, possibilities, such as a victory for the far-right Marine Le Pen in France’s presidential elections next year.
The single currency traded at $1.05 on Thursday evening — far below its 2008 peak of $1.5979. It has not fallen to $1 or below since December 2002, the year euro notes and coins were introduced.
While some EU countries, such as Italy, have cheered on the euro’s fall in value, precisely because of its impact on exports, the currency’s recent weakness and the low interest rate policy that underpins it, is much more controversial in Germany, the eurozone’s economic powerhouse.
Throughout 2016, the single currency has lost 4 per cent against the dollar, with many market participants expecting further weakness as US interest rates head upwards.
Most economists polled said the US central bank would raise rates at least twice next year after a 25 basis point increase this month.
“Higher rates in the US will raise the attractiveness of European exports and help the ECB’s goal of achieving higher inflation,” said Danae Kyriakopoulou, head of research at Omfif, a forum for central bankers. “But they risk causing problems to emerging markets with vulnerable external balances.”
By contrast with Mr Trump’s plans for a big infrastructure spending plan to boost the economy, the eurozone is likely to still rely on the European Central Bank, which the economists believed would keep to existing plans to roll out its landmark quantitative easing package.
More than three-quarters of those polled said the ECB would stick to its plan to buy €780bn in mostly government bonds to lift growth and inflation. The central bank is now buying €80bn worth of bonds a month, but, in accordance with a decision this month, will trim that figure to €60bn from March.
“The ECB is likely to play it safe, but the risk of a policy mistake has increased slightly following the December 2016 decision to scale down the pace of QE,” said Frederik Ducrozet, economist at Pictet Wealth Management.
On average, economists expected eurozone growth of 1.47 per cent and inflation of 1.26 per cent next year. Twenty-six of 28 respondents said the recovery would outlast 2017.
“The weak euro, expansionary monetary policy and the absence of fiscal consolidation will be supportive [of the eurozone’s recovery],” said Peter Bofinger, a professor at the University of Würzburg.
However, those polled acknowledged threats from the uncertain political climate and the problems of Italian banks.
“Italy is today the most fragile economy in the eurozone with low potential growth, one of the highest public debt levels, a high stock of non-performing loans and a weak banking sector,” said Laurence Boone, chief economist at Axa Group. “As well as an institutional framework which makes reforms difficult to get through.”
Highlighting another possible disruptive factor, almost 43 per cent of those polled said they expected a hard Brexit — a clean break between the UK and the EU — with just 14 per cent expecting a soft Brexit.
While most did not expect to see a win for Ms Le Pen in next year’s French election, many said if she did prevail it would weigh on the economy by fuelling the climate of uncertainty. Some said it would trigger an existential crisis for the euro.
“By raising the possibility of ‘Frexit’, Le Pen will naturally lead to an intensification of political uncertainty not just in France but across the region as a whole, and at the minimum dampen euro area investment and consumer spending in the short term,” said Chris Williamson, chief business economist at IHS Markit.
Some expressed concern over whether Mr Trump would follow through on his incendiary campaign rhetoric with policies to match. “[The impact of a Trump presidency] is ambiguous,” said John Llewellyn, a partner at Llewellyn Consulting. “The dollar’s strength would be positive for the eurozone’s economy. But protectionism, global uncertainty and financial volatility would not be.”
The survey was conducted between December 13 and 29. All of the responses will be published on ft.com
Source: Economists expect euro to fall to dollar parity in 2017
