Broker predicts euro value to overtake dollar

Heavyweight US broker Merrill Lynch thinks the euro could break past parity against the dollar this summer but remains confident superior US productivity growth should limit the dollar's downside by the year-end.

Falling equities, doubts about the US recovery and terrorist fears have heaped misery on the dollar, which continues to plummet, particularly against the euro. The European single currency broke through the $0.98 barrier earlier for the first time since February 2000.

Merrill Lynch's Bruce Steinberg conceded that the dollar is likely to weaken further in the short-term, especially against the euro, but remains sceptical about those who think euro zone profit growth will outpace the US.

"We think they've simply got it wrong," he said. "In the US, productivity growth is soaring and wage growth is slowing. That's a recipe for lower unit labour costs and fatter profit margins."

In the euro zone, productivity is stagnant while wage growth is accelerating, he said.

"That's a recipe for higher unit labour costs and shrinking profit margins," he said. "Simply put, European corporate earnings look far more likely to disappoint market expectations than do US earnings."

However, Steinberg reckons it will take "actual" US earnings visibility, rather than the prospect of an earnings revival, to dislodge the entrenched negative market sentiment about the dollar and US assets.

"In the meantime, the market is likely to remain focused on worries about US corporate earnings transparency and US asset valuations," he said. "That will leave the dollar vulnerable, particularly against the euro."

As a result, Steinberg has upgraded his euro forecast to $0.99 in September against an earlier forecast of 0.92.

By the year-end, he expects the euro to weaken under the weight of the stronger US rebound.