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Euro Wild Ride to ’06 Low Shows Risk Forecasts Undershooting

The euro’s stunning start to the week highlights a risk that currency bears will repeat the mistakes of last year by predicting too conservative a drop in 2015.

The single currency slumped to as low as $ 1.1864 today, the weakest since March 2006. The drop of as much as 1.2 percent from its previous close put the 19-nation euro close to the median estimate of $ 1.18 for this year-end among more than 50 strategists surveyed by Bloomberg News. Trading patterns suggest the euro-dollar pair, the world’s most-traded, could reach the 2005 low of $ 1.1640 if it closes below $ 1.18 this week.

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The euro added to its biggest annual decline since 2005 amid speculation the European Central Bank is closer to starting large-scale government bond purchases, while the Federal Reserve prepares to raise interest rates from a record low near zero. ECB President Mario Draghi last week gave his strongest hint yet that quantitative easing could be imminent, saying policy makers must act against the risk of deflation.

“We’re basically plumbing close-to-decade lows now, and I think the likelihood is that we see a continued breakdown,” Todd Elmer, a strategist at Citigroup Inc. in Singapore, said by phone today. “When you look at consensus forecasts for the euro, they likely are underestimating the downside.”

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Elmer sees U.S. dollar strength contributing more to the depreciation in the exchange rate this year than in 2014.

Bearish Forecasters

Citigroup joins Barclays Plc as the most bearish forecaster of the euro for end-2015, predicting a 10 percent drop to $ 1.07, a level unseen since April 2003.

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Strategists were too timid with their call for a decline in 2014 to $ 1.28. The single currency was at $ 1.1953 at 9:30 a.m. in London, after sliding 12 percent last year to $ 1.2098.

“The euro was so close to such a keenly watched round number as $ 1.20 that we didn’t need any fresh news to tip us over the cliff today, it just needed a little bit of a nudge,” Sean Callow, a currency strategist at Westpac Banking Corp. in Sydney, said by phone. “Even so, the scale of the move was still surprising. It was pretty wild.”

The euro-dollar pair accounts for almost a quarter of all trades in the $ 5.3 trillion a day currency market, according to the latest triennial survey by the Bank for International Settlements in Basel, Switzerland.

Greek Election

Economic data in coming days is forecast to show euro-area consumer prices dropped 0.1 percent in December from a year earlier, the first decline since 2009, while the U.S. unemployment rate fell to 5.7 percent, the lowest since June 2008.

“There’s a triple whammy of events that look set to trip up the single currency,” Steve Barrow, head of Group of 10 strategy at Standard Bank Plc in London, wrote in a client note today, referring to the inflation report, possible asset purchases by the ECB and a snap election in Greece. The euro will drop to $ 1.10 in the next 12 months, Barrow said.

Adding additional uncertainty to the euro-area outlook, Greece began an election campaign that may see victory for the anti-austerity Syriza party this month, potentially jeopardizing the country’s place in the currency union.

If the euro closes under $ 1.18 this week, that would take it below a descending trend channel stretching back to July, and would herald a drop to as low $ 1.1640, according to Yusuke Fujishima, a senior manager for currency and financial product trading at Mitsubishi UFJ Trust and Banking Corp.

The euro last week formed a bearish pattern on its weekly candlestick chart called a black closing marubozu — meaning shaven-headed monk in Japanese — which has a long colored bar with an upper shadow but no lower one.

“This is an extremely strong sign of further euro weakness,” Fujishima said today by phone from Osaka. “We need to watch the battle for $ 1.18 very carefully this week.”

To contact the reporters on this story: Kevin Buckland in Tokyo at [email protected]; Hiroko Komiya in Tokyo at [email protected]

To contact the editors responsible for this story: Garfield Reynolds at [email protected] Jonathan Annells, Todd White

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