Bank of America Revises Currency Forecasts on Economy

(Bloomberg) -- Bank of America Securities-Merrill Lynch revised its forecasts for the dollar, yen, euro and pound on the “rising probability” the global recession has passed its lowest point.The euro will recover against the dollar and the yen faster than previously forecast and the British pound will strengthen versus the euro and the dollar more than formerly predicted, the bank said in a research report dated yesterday. The euro will decline to $1.20 in September and $1.22 by year-end, compared with previous targets of $1.24 and $1.18, the report said.

“We have made some modest adjustments to our foreign- exchange forecasts, reflecting the rising probability that the worst is behind the global economy,” analysts including David Powell in London wrote in the report. “The main forecast changes at this stage are a shallower trough for both risky currencies and euro-dollar this summer, and a steeper U.S. dollar decline in 2010.”“The near-term dollar outlook is for appreciation as the U.S. current-account deficit shrinks rapidly, European banking sector de-leveraging creates dollar demand and underlying asset markets remain volatile,” the report said. “Longer term, the dollar is vulnerable to a sustained and widespread return to risk-seeking behavior.”

The euro rose 1 percent to $1.3273 as of 4:20 p.m. in London. It has dropped 5 percent against the dollar this year, and gained 1.6 percent versus the Japanese yen.

Rising Pound
The pound will strengthen to 89 pence per euro in June, 87 pence in September and 85 pence by the end of the year, Bank of America said in the report. Its previous forecasts were for 91 pence, 89 pence and 87 pence respectively.The British currency will drop to $1.44 in June, and to $1.38 in September, before strengthening to $1.44 by the year end, it said.The pound rose 1.1 percent to $1.4790 and was little changed at 89.83 pence per euro.“With the Bank of England having already implemented a policy of full blown quantitative easing, all the ‘bad news’ is now priced in for the pound,” Bank of America said. “On the other hand, the euro faces the risk of further easing measures from the European Central Bank.”