Barrons – “Large investors will think twice about further investment in the euro, at least until such uncertainties are resolved,” notes BNP Paribas’ currency strategist, Hans-Guenter Redeker. Most investors have yet to pencil in much weakness beyond this year, and a survey of global banks pegs the euro at $1.30 for 2011. Still, dollar bulls like BNP and Brown Brothers see the euro pushing down to parity, or $1, early next year.
If belt-tightening works, Europe will have to replace waning domestic consumption with foreign demand, and a weaker euro will make exports more competitive. Yet “if fiscal-austerity plans don’t work, the euro loses credibility. Either way, the euro weakens,” says Marc Chandler of Brown Brothers Harriman.
The interest-rate outlook also favors the greenback. The U.S. may have a knack for keeping borrowing costs artificially low and swelling asset bubbles, but even its benevolent central bank will have to consider raising rates as the economy expands for a fourth straight quarter and as employers hire again. In contrast, a big swath of Europe is grappling with sluggish growth, and Spain is plagued with 20% unemployment (see table below). The ECB can’t easily boost rates before the U.S. does.