Euro outlook cut again after botched Cyprus bailout - Reuters poll

LONDON Wed Apr 3, 2013 6:16pm BST

A worker sweeps in front of a branch of Bank of Cyprus in Bucharest April 1, 2013. REUTERS/Bogdan Cristel

A worker sweeps in front of a branch of Bank of Cyprus in Bucharest April 1, 2013.

Credit: Reuters/Bogdan Cristel

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LONDON (Reuters) - Evaporating hopes for an economic recovery and last month's botched bailout of Cyprus persuaded analysts to chop their outlook again for the euro over the coming months, a Reuters poll showed.

Although the median expectation of more than 60 analysts surveyed over the last few days shows the euro trading around its current levels near $1.28 (84 pence) over the next few months, further out, the poll shows the currency weakening to around $1.25.

Overall, forecasts for the euro were about 2 cents weaker compared with last month's poll, which also reflected its roughly 6 percent depreciation against the dollar since the start of February.

The poor state of the euro zone economy was the chief reason why the euro is expected to weaken further, with surveys on Tuesday showing a worsening manufacturing slump in the currency bloc.

The median outlook for the euro was the weakest since September last year, when European financial markets were in turmoil as speculation grew that Spain would soon need a banking sector bailout, which it eventually got in December.

"We expect euro zone fundamentals to deteriorate further. This, combined with outflow pressures, should keep the euro's downward trend intact," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

Asked which currencies investors were most likely to buy at the expense of the euro following the Cyprus bailout, 22 out of the 26 who answered said the U.S. dollar, with seven responses each for sterling and the Australian dollar.

"If the euro comes under further stress, we expect the growth-linked currencies like the Australian and Canadian dollars to benefit instead," said Emmanuel Ng, currency strategist at OCBC Bank in Singapore.

EURO BEARS OUT IN FORCE

Cyprus struck a 10-billion euro bailout deal with the European Union and International Monetary Fund last week, designed to untwine it from a failed banking sector that has long dominated its economy.

While tiny in economic terms, the chaotic bailout deal highlighted the political discord that has left Europe's economy rudderless, with the latest data showing signs of further deterioration rather than recovery.

The euro's recent decline versus the dollar reflects these poor economic fundamentals far more so than ebullient European stock markets. The FTSEurofirst 300 index has rallied more than 6 percent since the start of the year.

The poll showed the euro declining to $1.27 in six months, and $1.25 a year from now.

Bearishness about the euro's prospects among respondents was palpable, matching data from the Commodity Futures Trading Commission that showed traders increased their short bets against the euro through March.

Out of 58 contributors who took part in both the April and March foreign exchange polls, slightly more than half, 31, cut their 12-month outlook for the euro.

Fewer than a third of analysts expect the euro to be stronger in 12 months than its current level near $1.28.

Against sterling, analysts expect the euro to trade near 85 pence over the next year.

(Analysis by Somya Gupta and Namrata Anchan; Polling by Somya Gupta and Ashrith Doddi; Editing by Susan Fenton)

(andy.bruce@thomsonreuters.com +44 207 542 3484 Reuters Messaging: andy.bruce.thomsonreuters.com@reuters.net)

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