€ : Heading to parity

The fiscal crisis in Europe has already driven the dollar to a 3-year high against the euro. Relative to purchasing power parity, however, the US currency is still a little undervalued. What’s more, it has been a lot more expensive in the past.

We think there are three reasons :

• First, we are becoming increasingly convinced that doubts about the long-term survival of the euro are not going to go away. The support package cobbled together by EU governments and the IMF may have averted a near-term sovereign debt crisis, but it is conditional on massive fiscal consolidation (and structural reform) that may ultimately prove too much for the electorates of some Member States in the euro-zone to bear.

• Second, there has been a shift in the relative outlook for economic growth. In light of the scale of the coming fiscal squeeze in the euro-zone, we see a lower  GDP for the EU region ( 2010 & 2011).

• Third, relative interest rate differentials may soon start to favour the US currency.

All that should be good news for the Global EU businesses after all…