The euro will reach parity with the dollar within six months, according to Amundi

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Europe’s biggest asset manager is betting the euro will fall to par with the US dollar this year as the growing threat of recession prevents the European Central Bank from raising interest rates above zero.

Vincent Mortier, chief investment officer at Amundi, said he expects the ECB to prioritize maintaining a cap on government borrowing costs over fighting inflation. Such a move would leave the euro zone’s central bank even further behind the US Federal Reserve in fighting inflation and would take the euro down to $1 for the first time since 2002, Mortier said in an interview with the Financial. Times.

“We are facing weaker growth or probably a recession in the eurozone,” Mortier said. “We see the euro at par [with the dollar] in the next six months.

The French asset manager, which oversees more than €2bn in assets, is sticking to bets in its portfolios that benefit from a weaker euro even after the common currency fell 10% from to the dollar over the past six months, according to Mortier.

“We are facing weaker growth or probably a recession in the eurozone,” Mortier said. “We see the euro at par [with the dollar] in the next six months.

The euro stabilized near the five-year low of $1.047 hit in late April after falling as markets braced for a series of aggressive interest rate hikes from the Fed. The ECB is expected to follow suit, albeit more slowly, with opposition from some members of the central bank’s governing council to a rate hike in July – the first since 2011 – easing in recent weeks amid surge in inflation.

However, markets are overestimating how far the ECB will be able to raise interest rates before it is stalled by a failing economy and concerns over rising borrowing costs for some of the most indebted member states. of the eurozone, Mortier said.

He expects a rise of just two quarter points later this year from the current record low of minus 0.5% before the ECB shutdown. Money markets are currently forecasting at least three such hikes in 2022 and another hike to around 1.5% by mid-2024.

The Fed, by comparison, has already raised its policy rate by 0.75 percentage points so far this year to a range of 0.75 to 1%. It is expected to continue to aggressively tighten policy in the months ahead.

“We think they will come to zero on the [ECB] deposit rate and that’s it,” Mortier said. “In the meantime, the Fed will have done a lot more. If the ECB focused only on inflation, then 1.5% would be very likely. But it’s not.”

According to Mortier, the official mandate of the ECB – to keep inflation close to 2% – has indeed become its third priority behind the preservation of the “integrity of the euro zone” by limiting the differences in borrowing costs between the member states and supporting economic growth while the bloc is reeling from the fallout from the Russian invasion of Ukraine.

The central bank is focused on “the level of indebtedness, sovereign financing has to pay for the energy transition and for defence,” Mortier said. “The ECB has no choice but to be dragged into this political project.”

The ECB has said it could introduce a ‘new instrument’ to limit borrowing costs for weaker eurozone states as the prospect of an end to central bank purchases drives bond yields sharply higher. for Italy and Greece. But such a plan is unlikely to gain the necessary support from northern European members who are worried about the use of monetary policy to fund government spending, Mortier said. Without such a tool, the ECB will have little choice but to slow the pace of interest rate hikes, he added.

A return to parity with the dollar would complete a long round trip for the euro, which fell below $1 shortly after its inception in 1999 but rose above the greenback in 2002 as its international use was increasing rapidly.

A weaker currency will exacerbate inflation in the eurozone, which hit a record annual rate of 7.5% last month, adding to pressure on the cost of living, according to Mortier.

“Losing sight of the euro-dollar exchange rate is a big mistake when your inflation comes mostly from imported goods,” he said.

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