Europe’s largest asset manager is betting that the euro will fall to parity with the US dollar this year as the mounting threat of recession prevents the European Central Bank from lifting interest rates above zero.
Vincent Mortier, chief investment officer at Amundi, said he expected the ECB to prioritise keeping a lid on government borrowing costs over fighting inflation. Such a decision would leave the eurozone central bank even further behind the US Federal Reserve in fighting inflation and knock the euro to $1 for the first time since 2002, Mortier said in an interview with the Financial Times.
“We are facing lower growth or probably a recession in the eurozone,” Mortier said. “We see the euro at parity [with the dollar] in the next six months.”
The French asset manager, which oversees more than €2tn of assets, is sticking with wagers in its portfolios that profit from a weaker euro even after the common currency has slumped 10 per cent against the dollar over the past six months, according to Mortier.
The euro has steadied near the five-year low of $1.047 reached in late April after a fall that came as markets geared up for a series of aggressive interest rate rises from the Fed.
The ECB is expected to follow suit, albeit more slowly, with opposition among some members of the central bank’s governing council to a July rate increase — the first since 2011 — softening in recent weeks amid soaring inflation.
However, markets are overestimating how far the ECB will be able to lift interest rates before it is stymied by a faltering economy and concerns about rising borrowing costs for some of the eurozone’s more indebted member states, Mortier said.
He expects just two quarter-point rises later this year from the current record low of minus 0.5 per cent before the ECB stops. Money markets are currently pricing in at least three such increases in 2022 and a further rise to roughly 1.5 per cent by mid-2024.
The Fed, in comparison, has already lifted its policy rate by 0.75 percentage points so far this year to a range of 0.75 to 1 per cent. It is expected to continue tightening policy aggressively in the months to come.
“We think they’ll get to zero on the [ECB] deposit rate and that’s it,” Mortier said. “In the meantime the Fed will have done much more. If the ECB were focused only on inflation, then 1.5 per cent would be very likely. But it’s not.”
According to Mortier, the ECB’s official mandate — to keep inflation close to 2 per cent — has in effect become its third priority behind preserving “the integrity of the eurozone” by limiting the gaps in borrowing costs between member states, and supporting economic growth while the bloc reels from the fallout from Russia’s invasion of Ukraine.
The central bank is focused on “the level of debt, sovereign financing needs to pay for the energy transition and for defence”, Mortier said. “The ECB has no choice but to be pulled into this political project.”
The ECB has said it could introduce a “new instrument” to keep a lid on the borrowing costs of weaker eurozone states, as the prospect of an end to central bank purchases drives a sharp increase in bond yields for Italy and Greece. But such a plan is unlikely to garner the necessary support from northern European members who worry about the use of monetary policy to finance government spending, Mortier said. In the absence of such a tool, the ECB will have little choice other than to slow the pace of interest rate rises, he added.
A return to parity with the dollar would complete a long round trip for the euro, which sank below $1 shortly after its creation in 1999, but rose above the greenback in 2002 as its international usage grew rapidly.
A weaker currency will exacerbate inflation in the euro area, which hit a record annual rate of 7.5 per cent last month, adding to the squeeze on the cost of living, according to Mortier.
“Losing sight of the euro-dollar exchange rate is a big mistake when your inflation is mainly coming from imported goods,” he said.
Source: Economy - ft.com
