Euro to Drop as Traders Most Bearish Since 2003, Survey Shows

June 15 (Bloomberg) — Currency traders, investors and strategists are more bearish on the euro than they’ve been in more than two years, according to a Bloomberg News survey.
Eighty percent of the 44 participants polled from Sydney to New York on June 10 said to sell the euro against the dollar, up from 47 percent a week earlier and the most since Bloomberg began currency surveys in February 2003. Fifty-three percent advised selling the 12-nation currency versus the yen.

The euro is headed for the biggest back-to-back quarterly decline against the dollar since 2000 as the European Central Bank resists pressure to reduce interest rates to arrest sluggish growth. Exports are declining in Germany, the region’s largest economy, manufacturing in France is weakening and Italian gross domestic product shrank the most in five years last quarter.
“There’s massive pressure for a rate cut, but the ECB is still resisting,” said Stephen Jen, global head of currency strategy at Morgan Stanley in London, who lowered his euro forecast on June 9. “The euro possibly faces its most testing time since 2000.” That year the U.S., Japan and other Group of Seven nations bought the currency after it fell to a record.
Against the dollar, the euro declined 1 percent last week to $1.2120 at 5 p.m. in New York on June 10, according to currency- dealing system EBS. The dollar strengthened 0.9 percent to 108.67 yen. Jen predicts the euro will weaken to $1.19 by Dec. 31.
Withstanding Pressure
The ECB has so far refused to bow to politicians including Italian Prime Minister Silvio Berlusconi, saying rates at a six- decade low of 2 percent are sufficient to support investment and consumption. The International Monetary Fund and the Organization for Economic Cooperation and Development said the central bank may need to lower borrowing costs to spur an economic revival.
ECB President Jean-Claude Trichet refused to rule out lowering rates at a briefing in Frankfurt on June 2, contrasting with comments made a month earlier when he said a cut wasn’t an option. Otmar Issing, who votes on rates at the ECB, told the Handelsblatt newspaper on June 6 that the bank’s strategy doesn’t “rule out” a reduction.
“The ECB is probably more comfortable with the euro being weaker, given that growth has been so dependent on exports,” said Fiona Lake, a global markets economist at Goldman Sachs Group Inc. in London. “The pressure to cut rates is still there, though, and it’s building.”
The euro declined on June 8 after Axel Weber, who votes on rates at the ECB, said the German economy may get “a certain relief from the exchange rate.” The following day a government report showed exports, which account for a third of gross domestic product in Germany, unexpectedly fell in April.
Group of Eight
U.S. Treasury Secretary John Snow urged European officials at a meeting of finance ministers from the Group of Eight on June 11 to implement policies to revive their economies. The ministers said in a statement in London that “vigorous action” is needed to insulate a weakening world economy from high oil prices and imbalances in growth and trade. The statement didn’t mention currencies.
Investors may also push the dollar higher as the Federal Reserve increases its target rate for overnight loans between banks and the yield advantage of U.S. Treasury notes widens, said Frida Gjorstrup, a currency strategist at JPMorgan Chase & Co. in London.
The spread between 10-year U.S. Treasury notes and similar- maturity German bonds widened to the most in two months on June 10. The gap increased to 90.8 basis points from 73.8 basis points a week earlier and may grow to 200 basis points by year-end, said Gjorstrup. A basis point is 0.01 percentage point.
JPMorgan raised its dollar forecast on June 8 to $1.20 per euro by year-end, from a previous estimate of $1.30.
`Short-term Bounce’
The euro’s decline last week was expected by most of the participants in Bloomberg’s previous currency survey, who on June 3 said the dollar would rally. The survey has correctly forecast the direction of the euro against the dollar in 18 of the past 28 weeks.
Gains in the U.S. currency may be limited because sentiment may have swung too far in its favor, said Paul Robson, a currency strategist at Royal Bank of Scotland Group Plc in London.
“When everybody is looking for the currency to go one way, there’s a real risk that we get a short-term bounce back in the euro,” Robson said. “In the longer term it’s going to be hard to resist the strength of this dollar rally.”
Futures traders pared bets the euro will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed on June 10. The difference in the number of wagers by hedge funds and other large speculators on a drop in the euro compared with those on a gain — so-called net shorts — was 17,771 on June 7, down from 18,310. Euro shorts were still the second highest since 2000.
Narrower Deficit
The dollar may also be boosted this week as concern about the U.S. trade deficit recedes, said John Rothfield, a currency strategist at Bank of America Corp. in San Francisco.
The U.S. currency rose to the highest this year on June 10 after the Commerce Department said the deficits, the amount by which imports exceeded exports, were less than economists’ expected in March and April.
“We’re encouraged by the trade figure and it does look more hopeful that any increase in the deficit is slowing down,” Rothfield said. “That’s been one of the standards of our view that the dollar will recover.”
The dollar fell for three years through 2004 against the euro and yen amid record trade and fiscal deficits and the lowest interest rates in four decades.
The following are the results of Bloomberg’s survey showing the number of recommendations for major currencies:
Euro 7 35 2
Yen 10 21 13
British pound 9 24 11
Swiss franc 12 23 9
Australian dollar 12 18 14
Canadian dollar 4 7 8
Euro versus yen 5 23 10
To contact the reporter on this story:
Rodrigo Davies in London at

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