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Euro Forecasters See Pain After Worst Year Since 2005

Midway through European Central Bank President Mario Draghi’s May press conference in Brussels, the euro rose to its strongest level during his tenure. Then he said the ECB was ready to introduce more stimulus measures, sending it into a slide that strategists say will extend into 2015.

Europe’s common currency, which appreciated to $ 1.3993 that May day, ended last year down 12 percent against the dollar at $ 1.2098, its biggest loss since 2005. Strategists, who were too timid with their call for a decline in 2014 to $ 1.28, now see a slump to $ 1.18 by the end of this year.

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A weaker euro is key for Draghi as he tries to spur the region’s struggling economy and ward off deflation. This week, ECB Chief Economist Peter Praet told German newspaper Boersen-Zeitung the threat of a drop in consumer prices is increasing, bolstering speculation policy makers will soon start actions such as buying bonds that tend to weigh on a currency.

“The euro-bearish consensus was struggling hard for the first half of the year, but it has come good as the ECB has driven rates down,” Kit Juckes, a global strategist at Societe General SA in London, said in a Dec. 30 phone interview. “The best thing the ECB can try to engineer is still a weaker euro.”

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Juckes forecasts the euro will weaken to $ 1.14 by year-end, a level last seen in 2003. It traded at $ 1.2503 as of 1:50 p.m. today in Tokyo.

Below Target

With inflation languishing below the ECB’s goal of just under 2 percent and the market’s outlook for consumer prices crumbling as crude oil declines, more than 90 percent of respondents in a monthly Bloomberg survey in December predicted that the ECB would expand the supply of euros by beginning to purchase sovereign bonds in 2015. That’s up from 57 percent the previous month.

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The euro-area may see “negative inflation during a substantial part of 2015” amid a slide in crude, and the Governing Council “cannot simply look through” that, Praet said in comments published Dec. 31 on the ECB’s website. “Inflation expectations are extremely fragile” and “the risk of second-round effects seems to be greater today than it was in the past,” he said.

Since the May meeting, the ECB cut its deposit rate below zero for the first time on record, began a program of targeted loans, and started purchasing asset-backed securities and covered bonds. At the same time, the dollar is strengthening as the Federal Reserve moves closer to raising interest rates.

‘Bolder Leader’

Forty-four of 59 analysts in a Bloomberg survey say the euro will drop against the dollar next year. With the median projection looking for a 2.5 percent decline through Dec. 31, they’re less bearish than at the same point last year.

“It’s the ECB where we’ve seen the biggest evolution,” Michael Sneyd, a currency strategist at BNP Paribas SA in London, said Dec. 23. “Over the past 12 months, Draghi has been a bolder leader. Our view for the next year is for continued declines in euro-dollar.”

BNP expects the euro to decline to $ 1.15 by the end of 2015, he said.

Some strategists aren’t convinced the ECB will be able to push the currency lower, even if it begins purchases of sovereign bonds in a program of quantitative easing.

‘Downside Risks’

Draghi said Dec. 4 that officials would act should current stimulus be seen as insufficient when it’s assessed in early 2015. He has also said that in order to add as much as 1 trillion euros to the institution’s balance sheet, “all assets but gold” are under consideration for purchase.

“I want to see how this plays out, certainly through January, before drawing strong conclusions,” Jane Foley, senior foreign-exchange strategist at Rabobank International in London, said in a Dec. 23 interview.

Foley predicts the euro will end 2015 at $ 1.20 and sees “downside risks” to her forecast, she said. “It’s very difficult to draw firm conclusions as to how much the quantitative easing will succeed in depressing the euro further because if so much is already in the price, how much further down can the euro go?”

Options traders are paying more than at any time in over a year to protect against further losses for the euro, whose membership expanded to 19 nations at the start of 2015.

The premium for one-year options to sell the euro over those to buy it is 154 basis points. It touched 159.5 basis points on Dec. 18, the most since October 2013.

Traders are willing to pay a higher price for options to sell the euro for every period from one day to 10 years, according to data compiled by Bloomberg.

“Looking into 2015, I think we will move towards a level that does reflect the situation in the economy and monetary policy,” Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London, said Dec. 22. “$ 1.10 seems about right for next year. The opening few weeks of the year will be a time to be cautious, but on the whole, do I think the euro goes down? Yes, absolutely.”

To contact the reporter on this story: David Goodman in London at [email protected]

To contact the editors responsible for this story: Paul Dobson at [email protected] Robert Burgess

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