The euro’s exchange rate against the dollar will fall to $0.95 by 2017, taking the single currency back below parity for the first time in more than a decade, according to a report by Deutsche Bank.
The call by Germany’s biggest bank, the world’s second largest currency trader, is the most aggressive yet from a major investment house, the majority of whom have already turned overwhelmingly bearish on the euro.
The report, arguing that rock bottom investment returns and huge trade surpluses would drive a flood of capital out of Europe, implies a further 25 percent depreciation of the euro. The currency has already slumped 10 percent since May, when it reached a two-and-a-half year high just under $1.40.
The consensus view among the major foreign exchange players is that the euro will continue to slide over the next year but it was last worth less than one dollar in 2002, the end of an early stage crisis of confidence in the euro project.
Barclays has predicted the euro will fall to $1.10 in a year’s time and continue to fall thereafter. Goldman Sachs has it at parity with the dollar in 2017.
Current account surpluses are generally seen as a positive for currencies and many commentators have pointed to Germany’s huge overspill on trade as one of the key factors propping up the euro in the first half of this year.
Deutsche’s George Saravelos, however, said that instead it would be that surplus, allied to the climate of ultra low domestic growth, that would shrink returns on any investment in Europe and so drive the euro lower.
“We expect Europe’s huge excess savings combined with aggressive ECB easing to lead to some of the largest capital outflows in the history of financial markets,” he wrote in the note sent to clients late on Monday.
“At around 400 billion dollars each year, Europe’s current account surplus is bigger than China’s in the 2000s. If sustained, it would be the largest surplus ever generated in the history of global financial markets. This matters,” he wrote.
Saravelos said that by weakening the euro with asset purchases, and keeping returns on bonds and savings in Europe at very low levels, the European Central Bank would only add to the pressure for capital to be sent abroad to earn.
“Euroglut means that as the world’s biggest savers, Europeans will drive international capital flow trends for the rest of this decade,” Saravelos said.
“Europe will become the 21st century’s largest capital exporter. The next few years will mark the beginning of very large European purchases of foreign assets.” (Reporting by Patrick Graham, Editing by Jamie McGeever/Ruth Pitchford)