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The Euro's Weakness Is Here to Stay: Analysts

Even if the European Central Bank holds rates on Thursday the euro's supremacy on the currency markets is close to an end, analysts said on Wednesday.

The ECB, with its mandate to look only at inflation when setting monetary policy, is "crazy" to leave the interest rate as high as its current 4.25 percent, Shane Oliver, head of investment strategy & chief economist at AMP Capital Investors, told CNBC Europe.

But although the high rate is hurting growth, it is unlikely to boost the euro further against the dollar, as the balance of power between the euro-zone and the U.S. has shifted.

"A lot of the U.S. bad news is out of the way. I think the feeling in Europe is that we're in for some bad numbers," Paul Bednarczyk, currency strategist at 4Cast, told CNBC.com.

The dollar's upward trend is likely to continue "barring any major shocks, any major banks collapsing or another credit crunch," Bednarczyk said.

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The Organization for Economic Co-operation and Development on Tuesday raised its annual forecast for U.S. growth to 1.8 percent from a 1.2 percent estimate in June, while it cut a previous prediction for the euro zone to 1.3 percent from 1.7 percent.

Further Dollar Strength

August was the best month in 15 years for the dollar, and analysts said the greenback will probably offer more pleasant surprises.

"I guess in the medium term (the dollar's firming) is going to be sustainable, and I assume that we will have further strength over the year," Hans Redeker, global head of foreign exchange strategy from BNP Paribas told CNBC.

"It seems to me that decoupling has taken place, but just on the other side of market expectations," Redeker added.

But ECB officials kept up their anti-inflation rhetoric in the week before the decision, suggesting that a rate cut was still not on the bank's radar. In fact, vice president Lucas Papademos said further rate rises could be needed if stubbornly high inflation sparked a wage-price spiral.

Fellow policymakers Axel Weber and Lorenzo Bini Smaghi echoed Papademos and took a tough stance against cutting interest rates from their 4.25 percent, while Bini Smaghi said that even rates of 4.5 percent would not be very restrictive.

Despite the saber rattling, the ECB's next move is expected to be a cut in the rates, if only towards the end of the year or early next year.

Euro's Fatigue

Meanwhile, the single currency's weakening is not confined to the dollar, analysts said. Although the British pound recently fell to its lowest level against the euro, the move was "helped" by UK Chancellor Alistair Darling's blurting out that the worst recession in 60 years may be looming.

Euro-sterling "at these levels, it's looking oversold," said Bednarczyk, who sees the pair settling at around 0.815 pound for one euro.

UK officials have been airing their worries about recession freely. In Europe fears may be hidden behind closed doors but this doesn't mean the economies there are in top shape, he added.

Analysts are looking beyond the ECB decision to Friday's U.S. payrolls report for more clues on how fast the greenback's recovery will be.

"We have to prepare for another round of weak data from the U.S. and that could take a bit of shine off the dollar in the short term. In the long term I think the U.S. dollar is going to be strong," Redeker said.

Bednarczyk sees the euro's exchange rate at $1.43 to $1.44 by the end of the year, at $1.38 in one year and at $1.30 in two years, with the greenback picking up gradually but not in a linear pattern.

"I think Europe would be happy to see the euro at $1.30 but I don't think it would suit the U.S. If the dollar picks up, they would have the twin deficits problem again," he said.

Contact Europe: Economy

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