Euro Could Hit Dollar Parity in Three Months, Say Analysts

Euro
The euro sign landmark is seen at the headquarters (R) of the European Central Bank (ECB) in Frankfurt September 2, 2013. The ECB council will hold its monthly meeting on Thursday, September 5. Kai Pfaffenbach/ REUTERS

The euro could sink to parity with the U.S. dollar within just three months, driven partly by fears over a Greek exit from the Eurozone, according to analysts.

The European Central Bank (ECB) launched a new programme of quantitative easing (QE) on Monday, which has contributed to the euro falling to its lowest level against the dollar in 12 years. As of 3pm today, the euro/dollar rate on the London Stock Exchange was 1.06.

The declining value of the euro is of concern to British and U.S. businesses, whose exports will be more expensive for Eurozone nations and thus could see a fall in demand. The continuing doubts over Greece's ability to meet its bailout repayments also contribute to a sense of insecurity which could lead the currency's value plummeting even further.

Jennifer McKeown, senior European economist at independent analysts Capital Economics in London, predicts that the euro's decline will continue in the near future.

"Our forecast is parity within the next three months and some partial recovery after that," she says. "I think in the short term it could go a bit lower [than parity] and then rise up to about 1.10 by the end of next year."

McKeown highlights Greece's financial woes as a key factor in determining the rate of decline and says that current negotiations are not having a particularly positive affect. Greece recently agreed a four-month extension to its €240 billion bailout programme, yet fears remain over whether the country is committed to keeping up with repayments.

"At the moment negotiations with Greece don't seem to be going well. There have been some pretty unencouraging comments from both sides," says McKeown. "If Greece doesn't keep up with its bailout payments I don't think there's any option but a disorderly default and Greece leaving the Eurozone."

The ECB's programme of QE, or bond-buying, involves creating extra money to buy public bonds from banks. The new money swells banks reserves and is designed to promote investment by stimulating banks into taking out more loans. The ECB has committed to increase its monthly purchases from €13 billion to €60 billion until September 2016.

The euro's declining rate contrasts with the growing U.S. economy, where analysts are predicting an interest rate hike by the Federal Reserve in the next few months, a policy aimed at balancing supply with demand and avoiding excessive inflation.

Jack Meaning is a research fellow at the National Institute for Economic and Social Research. While his estimate of the rate of decline is more conservative, he says that the instability in Europe means the euro could drop in value even more.

"My current thought is that it will hit parity within the next six months or so. Whether it stays there for a long time is a tough question."

The falling exchange rate will be good for eurozone businesses, as products will be cheaper for non-eurozone trading partners. However, the decline is likely to hit partners not in the single currency, such as the UK, whose imports are becoming more expensive for eurozone countries.

"It will make some of the UK's imports cheaper but on the other hand it makes them less competitive in the eurozone, so those exporting a lot to the eurozone might struggle to export their goods. UK hotels might start to look more expensive to European customers," says McKeown.

The benefits of the rate drop will be most keenly felt among outward-facing European countries which export outside the single currency. According to Tom Rogers, senior Eurozone economist at Oxford Economics, countries like Germany and Spain stand to benefit due to their high rates of export to non-Eurozone countries.

"The declining value is good for most economies but its impact will be felt most strongly where export relationships outside the eurozone have grown most over the last few years," says Rogers.