World's best forecaster targets euro-dollar parity

Being more bearish on the euro than the consensus helped ING Groep NV become the world's most accurate currency forecaster in 2014. The Dutch bank sees no reason to change its strategy now, breaking from the pack to predict a drop to parity with the dollar within two years.

After watching the 19-nation currency slide as low as $1.1754 today from last year's high of $1.3993 in May, ING sees it continuing to weaken all the way to $1, a level last seen in 2002. ING expects measures by the European Central Bank to boost the euro zone's flagging economy and avoid deflation will have direr consequences for the currency than most other firms. Few investors will want the euro as policy makers expand the money supply, especially as the Federal Reserve makes dollar assets more attractive by raising interest rates.

"We are one of the most bearish houses on euro-dollar," Petr Krpata, a foreign-exchange strategist at ING in London, said yesterday by phone. "It looks as if the Fed will start hiking rates sooner rather than later, potentially even late in the second quarter, and this will further fuel the divergence on policy."

In one of its best calls, ING predicted at the start of 2014 the euro would fall 13 percent to $1.20 by Dec. 31. It ended the year at $1.2098.

The euro traded at $1.1815 as of 12:35 p.m. in New York, within sight of the $1.1736 opening level on Jan. 1, 1999, when the single currency was introduced.

Strategists were given a new reason to be bearish on the currency yesterday when data showed euro-region consumer prices fell 0.2 percent in December from a year earlier, the first annual drop in five years. That added to pressure on ECB President Mario Draghi to start purchasing sovereign bonds as part of a strategy to inject cash into the economy and debase the euro.

Krpata, who helps compile Amsterdam-based ING's forecasts along with head of currency strategy Chris Turner, expects the ECB to announce so-called quantitative easing at its first policy meeting this year on Jan. 22, before outlining details on March 5. ECB officials have only said they're considering QE.

At the same time, there's a 58 percent likelihood the U.S. will raise its target federal funds rate from a zero-to0.25 percent range to at least 0.5 percent by September. Minutes of the Fed's December meeting published yesterday showed most officials agree the central bank is unlikely to increase rates before late-April.

Banks had to be ranked in at least eight of the pairs to qualify for the overall placing, with 59 succeeding. ING's score of 63.72 compares with No. 2 Credit Suisse Group AG's 59.24 and third-placed National Australia Bank at 58.82.

"The theme is still dollar strength," Shahab Jalinoos, the global head of foreign-exchange strategy at Credit Suisse in New York, said by phone on Jan. 5. "The Fed should start raising rates by June, which is earlier than what's priced in the market, and another three hikes in the next four meetings after that."

Credit Suisse estimates the euro will fall to $1.15 by the end of 2015 before trading at $1.19 a year later.

Dollar appreciation is "the cornerstone of our Group of 10 FX views," Raiko Shareef, a strategist in Wellington at Bank of New Zealand Ltd., a unit of NAB, said yesterday by phone. The euro and New Zealand dollar are the two currencies "that will suffer the most" versus the greenback this year, he said.

ING's top pick is to buy the dollar against Sweden's krona. The Scandinavian currency posted the second-worst performance in a basket of 10 developed-nation peers during the past 12 months, plunging 9.1 percent.

Sweden's Riksbank pledged in December to do whatever's needed to jolt the biggest Nordic economy out of a deflationary spiral. Because officials have limited room to maneuver on rates, they'll probably put a curb on the krona's value, Krpata said.

"Ordinary monetary mechanisms are exhausted," he said. "The Swedish krona will be even weaker than the euro."