Analysts from the world's largest banks don't expect the euro to recover anytime soon.
Of the 17 major currency-trading banks, 10 have lowered their euro forecasts over the past month, according to data compiled by DJ FX Trader. The median year-end euro forecast of these analysts is now $1.20, down from a previous $1.24 forecast in July and its current level of $1.2291 The forecast for June 2013 was cut to $1.19 from $1.21.
Analysts cited concerns about the possibility of a Spanish bailout or a Greek exit from the currency bloc as among the reasons for the lowered forecasts. Citigroup raised the likelihood of a Greek exit to 90% over the next 12 months to 18 months, up from its previous 50% to 75% chance.
Concerns also linger about a possible capital flight out of the euro zone, especially if Germany is forced to bail out its weaker European neighbors.
"If Germany does step in to help the periphery, that's going to reduce Germany's attractiveness as a safe haven, which could increase capital flight out of the euro area," said Brian Kim, currency strategist at RBS Securities.
The sharpest outlook cut came from Bank of America-Merrill Lynch, which lowered its year-end euro forecast to $1.15 from $1.30.
Goldman Sachs, BNP Paribas and HSBC were the most optimistic about the euro long term. While Goldman lowered its third-quarter euro forecast to $1.25 from $1.33 on mounting Italian and Spanish debt concerns, the bank expects the euro to trend higher as European officials lay out more concrete plans to rescue the region's economy.
Goldman projects the euro will rise to $1.33 by year's end and $1.40 by June 2013.
As the debt crisis brews in Europe, analysts favor the Australian dollar, raising their median year-end forecast to US$1.00 from US$0.98. Analysts expect more demand from investors and central banks for Australian assets, given the country's AAA-rating and a higher yield on its government debt relative to countries like the U.S. and Japan.
"The key driver has been foreigners searching for yield in Australian dollar assets," said Kevin Hebner, currency strategist at J.P. Morgan, which raised its third-quarter Australian dollar forecast to US$1.01 from US$0.95 and its year-end forecast to US$1.02 from US$0.98.
Although Australia is exposed to slowing Chinese growth, given China is the country's largest trading partner, analysts said stimulus from China's central bank would lift the Asian nation's economy and support the Australian dollar. Expectations for more easing from the Federal Reserve is also a factor since such Fed action has historically lifted commodities prices and helped commodity-driven Australia.
The only bank that lowered its Aussie forecast across the board was Nomura, which downgraded its Australian outlook on pessimistic growth prospects in Europe and China. However, "the reaction so far to increased tension in the euro-zone hasn't been as big as we were expecting," so the bank will revise its forecast higher in the coming weeks, said Charles St-Arnaud, a currency strategist at Nomura.
Write to Nicole Hong at firstname.lastname@example.org.
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