The euro and pound will weaken to more than three-year lows against the dollar by year-end as the central banks of the euro area and U.K. extend easy monetary policies that tend to debase currencies, according to UBS AG.
“The commitment by the European Central Bank and the Bank of England to keep interest rates low for extended periods is likely to cause the euro and the pound to weaken now when investors turn risk-seeking,” Mansoor Mohi-uddin, chief currency strategist in Singapore, wrote in a client note today.
The bank forecasts the euro will weaken to $1.20 by Dec. 31 and the pound will drop to $1.41. The shared currency last touched that level in June 2010, while sterling hasn’t declined to $1.41 since March 2009. Economists project the euro to close the year at $1.27 and the pound at $1.50, according to median estimates in Bloomberg surveys.
ECB President Mario Draghi and U.K. policy makers pledged to keep borrowing costs at record lows on July 4 after their respective rate-setting meetings. Federal Reserve Chairman Ben S. Bernanke said on June 19 the central bank may begin to slow its $85 billion-per-month stimulus program this year should the U.S. economy meet its goals for sustainable growth.
Policy divergence across the central banks will strengthen the dollar because the ECB and Bank of England’s low interest- rate policies will induce risk-seeking investors to shun the euro and the pound in favor of higher-yielding foreign assets, Mohi-uddin said.
The euro gained 0.4% to $1.2826 at 2:10 p.m. London time. It fell to a three-month low of $1.2755 yesterday. The pound rose 0.2% to $1.4901 after dropping to $1.4814 yesterday, the weakest level since June 23, 2010.