Euro ‘may hit parity with US dollar’

THE euro could reach parity with the US dollar if there are further shocks in the eurozone, according to Ulster Bank economist Simon Barry.

And he anticipates that the ECB will leave official rates in the eurozone at their present record of 1% until the second quarter of next year.

In the latest Ulster Bank Focus on Markets report, Mr Barry said the public finance crisis in the euro zone has triggered significant selling of the euro as developments of recent months have exposed major deficiencies in the institutional underpinnings and governance of EMU.

“The euro has already fallen sharply but has certainly not collapsed; in fact it is still above some estimates of fair value. This looks difficult to justify in the current environment and we expect further declines by year-end to $1.12 and 78p vs. the dollar and sterling respectively. There is a risk of an undershoot in the period ahead in the event of another major shock to the eurozone, which could see a return to parity or lower vs. the dollar and to 70p vs sterling,” he said.

Mr Barry said he had some concern that over the past two months anxieties about Greece have begun to affect broader financial market conditions, which had been showing steady improvement for most of the 12 months prior to April.

“Even a major set of policy initiatives in early May, including the €720bn EU/IMF financing facility and a ground-breaking, if controversial, ECB bond purchase programme have not been enough, to date at least, to convince markets that the situation is in hand,” he said.

Mr Barry argued that because of the fragile state of the debt markets decisive action is required immediately to demonstrate commitment to such a course of action.

“There has been some encouraging movement in the right direction on this front in recent weeks, with the UK, Germany, Italy, Spain and Portugal all announcing additional fiscal tightening measures.

“While such action is without doubt necessary to promote conditions conducive to sustainable economic growth in the medium-term, this extra fiscal tightening does represent an additional headwind to recovery as we move towards and into 2011,” he said.