As Euro Slides, Strategists Cut Forecasts

Some Investors See Single Currency Falling to Parity With U.S. Dollar

Rip up your euro forecasts.
A day after the European Central Bank unveiled its bond-buying program, the single currency still was in free fall, blowing past analysts’ expectations for how low the euro can go.
Some investors now say the euro could fall to the point where it is on equal footing with the U.S. dollar for the first time since it climbed above the buck in late 2002.
“If you would have asked me a few months ago, I would’ve said that parity could be in the cards in the years ahead. Now, we can’t rule it out anymore even by the end of this year,” said Thomas Kressin, head of European foreign exchange at Pacific Investment Management Co., or Pimco, which has $1.68 trillion under management.

More on the ECB and Euro

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• Draghi Calls for Deeper Economic Integration of the Eurozone
• ECB Announces New Stimulus
• Analysis: No Magic Bullet | What to Know
• Friday's Markets: Europe Stocks, Bonds Rally
• How Bond-Purchase Program Will Work
• Heard on the Street: The Risk-Sharing Riddle for Markets
• Overheard: Back to the Euro’s Future
• Analysis: The ECB Change the Game
• Goldman: These Stocks Will Benefit Most from ECB's QE
• Interactive: Central Bank Watch

Late Friday in New York, the euro fell 1.4% against the dollar, to $1.1206, on top of a 2.1% slide the day before. It is now down 7.4% against the dollar since the turn of the year and is at its lowest point in more than 11 years.
Morgan Stanley cut its estimate of where the euro will end 2015 to $1.05 from $1.12 previously. Bank of America Merrill Lynch sees the euro now falling to $1.10 by the end of the year, from $1.20 in an earlier forecast, while HSBC Holdings PLC analysts cut their year-end expectation to $1.09 from $1.15.
The downgrades have echoed Wall Street’s failure to predict outsize pullbacks over the past year in global government-bond yields and oil prices. Those declines have increased investor unease over the risks facing the global economy.

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Under the bond-buying program, known as quantitative easing, central banks create new bank reserves to buy assets from financial institutions. Central banks get bonds, and banks get money that they can in turn use to extend new credit to households and businesses. Such expansionary monetary policies usually weaken a country’s currency in part because lower interest rates make a currency less attractive to hold. In turn, a weaker currency makes exported goods more competitive overseas, which could benefit Germany’s export-driven economy.
A day after the ECB’s move, European stocks and bond prices soared. The Stoxx Europe 600 climbed to a seven-year high, ending the session up 1.7%. Germany’s DAX index rose 2.1% to another record, while the U.K.’s FTSE 100 gained 0.5% and France’s CAC-40 advanced 1.9%. Government bond prices from Spain, Italy, Portugal, Germany and elsewhere hit records, pushing yields lower.
The euro has held to a relatively lofty level in recent years, peaking at $1.60 in 2008 and trading close to $1.40 as recently as last May, in part because the ECB arrived late to the world of quantitative easing. The Federal Reserve, Bank of Japan and the Bank of England, meanwhile, have implemented stimulus efforts. The ECB’s bond-buying plan—to the tune of €60 billion ($68 billion) a month until at least September 2016—combined with record-low interest rates is meant to spur growth and stoke inflation.
“The ECB has effectively said this will go on until we see a significant adjustment in the path of inflation. That tells us [quantitative easing] is going to be with us for quite some time,” said Nick Gartside, chief investment officer for fixed income at J.P. Morgan Asset Management, which oversees $1.7 trillion of assets.
The flood of easy money and the fact that some central banks are charging banks to hold overnight deposits “will make sure capital continues to be pushed out of the euro area,” said Pimco’s Mr. Kressin, who is betting the euro will continue to weaken against the dollar. This combination means the euro “is a hot potato that everyone tries to get rid of,” he said.
The ECB’s asset-purchase program aligns the eurozone’s monetary policy more closely with Japan’s against that of the U.S. In October, the Fed closed down its large-scale asset-purchase program and is moving closer toward raising interest rates. Many Fed officials have signaled they expect to stick broadly to their plan to start lifting their benchmark short-term rate from near zero around the middle of the year.
Investors predict the euro will fall faster against the greenback than the yen in the near term because it has more pressing factors driving it lower.
“The euro area stands to be a winner of the currency wars in 2015,” said Jonathan Baltora, inflation-linked bonds fund manager at AXA Investment Management, which oversees €607 billion of assets, referring to the possibility that a weaker currency would make European goods cheaper than those produced in Japan and elsewhere.


U.S. Bank Wealth Management, which manages $126 billion, said the falling euro is causing eurozone sovereign bonds to lose their allure. U.S. Bank has positions in almost all eurozone sovereign bonds. But the low yields and dim prospects for the euro have the asset manager considering reducing them, particularly in German bunds, said Jennifer Vail, its head of fixed-income research.
“We have projections for the currency and balance them with projections for the debt,” Ms. Vail said. “Add a weak euro, and it’s not attractive a bet at all…the market needs to get its head around the implications [of the ECB’s move]. The euro definitely has more room to fall.”
AllianceBernstein LP, which manages $473 billion, added to its bearish euro currency bets one week ago in expectation of a bold move by ECB President Mario Draghi at the central bank’s meeting this past Thursday, said Scott DiMaggio, director of global fixed-income investments. The move surpassed the asset manager’s expectations.
“Capital will continue to leave the euro area,” Mr. DiMaggio said. “We think there will continue to be pressure on the euro. They haven’t even started to buy the assets yet.” For now, though, AllianceBernstein is holding its positions steady.
Write to Tommy Stubbington at tommy.stubbington@wsj.com