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Abu Dhabi, UAESaturday 20 October 2018

Euro likely to stay weak against dollar until mid-2019

Faster US rate increases and lower eurozone economic growth forecasts weighing on the currency

The euro is under pressure from the divergence of monetary policy between the US Federal reserve and the European Central Bank. REUTERS
The euro is under pressure from the divergence of monetary policy between the US Federal reserve and the European Central Bank. REUTERS

The euro is expected to remain weak against the US dollar until mid-2019 due to US interest rates climbing, European economies expected to report sluggish growth and political uncertainty related to Brexit, according to S&P Global Ratings.

The euro is under pressure from the divergence of monetary policy between the US Federal reserve, which is accelerating interest rate increases and the European Central Bank, which has not raised rates since the autumn of 2011 and is not expected to do so before the summer of 2019. The currency is down 2.24 per cent against the greenback year-to-date and trading at 1.173 to the dollar at 4:35pm UAE time.

“A relatively weaker eurozone economy, faster US Federal Reserve tightening, and political uncertainty has made euro assets relatively less attractive than their US counterparts, shifting money away from the euro," said S&P Global Ratings senior economist Marion Amiot.

The ECB, which has said it will end its €2.55 trillion bond purchase programme in December, is continuing with the so-called quantitative easing policy of pumping money into the economy to stimulate higher growth and nudge inflation to its target of 2 per cent.

In July the European Commission lowered its growth forecast for the eurozone this year due to trade tensions with the US and rising oil prices. Brent breached $80 this month as the market reacted to the implications of tightening sanctions on Iran, Opec's third largest oil producer.

The 19-member zone will slow to a projected 2.1 per cent this year from the 2.4 per cent figure posted last year, according to the commission said. S&P forecasts eurozone growth of 2 per cent in 2018.

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"From the third quarter of 2019, the start of the ECB hiking cycle and what we expect to be a period of less heavy political risk should support an appreciation of the euro against the dollar, especially given that the euro looks undervalued looking at the eurozone's strong current account surplus or purchasing power parity exchange rates," said Ms Amiot.