Barclays forecasts 12-month euro/dollar decline

Barclays has forecast that the euro/dollar will trend even lower over the next year with "real interest rate differentials".

The bank has reduced its 12-month forecast for the euro/dollar rate from $1.25 to $1.10, claiming that the European Central Bank (ECB) has been “taking actions that many thought unimaginable in the late spring”.

It also projected that the ECB could start purchasing European government bonds in next year’s first quarter.

However, George Magnus the independent economic adviser to UBS claimed there would be a less noticeable fall of $1.25 to $1.23 or $1.22. He said: “If it gets down to $1.10 that would have an effect.”

Barclays has compared the ECB complications with the policy dilemma experienced prior to the launch of Abenomics in Japan. The bank queried whether we are “on the verge of repeating the ‘Great Yen Carry Trade’” of the 1990s.

But the Financial Times (FT) reported that other analysts claim “the Eurozone stands to gain more than Japan from a large depreciation: the slide in the yen helped boost inflation, but has had no appreciable effect on export volumes”.

Stephen Jen, head of the hedge fund SLJMacro Partners, told the FT that the ECB would not be able to achieve its goals with the euro trading at its current level against the dollar.

He said: “$1.26 is not low enough. $1.20 is the bare minimum target, if the question is what level of exchange rate is needed for Italy and France to have a chance of recovering.”

Barclays reasserted that while inflation expectations continue to decline, the sector should expect a “significant and prolongued EUR downtrend as a result”.