British analysts says euro's strength will not be long lasting

Oil&Gas Materials 7 April 2011 13:28 (UTC +04:00)

Azerbaijan, Baku, April 7 /Trend, A.Badalova/

The European single currency will end 2011 worth around 1.30 dollars, analysts of one of British leading consulting companies for economic research Capital Economics believe.

The euro posted a fresh one-year high of more than 1.43 against the dollar on Wednesday ahead of today's ECB meeting, British analysts' report said.

We would not be surprised if the exchange rate rose even further to 1.45 by the end of
the second quarter. Thereafter, though, we expect Europe's single currency to come under pressure, ending the year worth around 1.30 dollars, analysts said.

Yesterday the euro reached more than 14-month high against the dollar on expectations the European Central bank will raise the interest rates at the meeting on Thursday, April 7.

The euro gained 0.8 percent to $1.4331 at 5 p.m. in New York, after touching $1.4349, the highest level since January 2010.

While interest rates are all but certain to be increased today and probably in July, too, we do not expect the ECB to raise them by as much as markets think over the next year or two, Capital Economics' analysts said.

Capital Economics analysts forecast a rate increase by the ECB by basis 25 points to 1.25 percent today.

They believe that there can be little doubt that a shift in interest rate expectations has been a major driving force behind the euro's rally against the dollar this year.

British analysts don't expect the dollar to get much support from expectations of tighter monetary policy. "But for the dollar/euro exchange rate, it is the gap between the expected level of interest rates in the euro-zone and the US that is likely to matter", they said.

There is clearly more to the dollar/euro exchange rate than expected interest rate differentials, the analysts believe.