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The euro’s slump to start 2020 is gaining momentum amid growing concern that Germany could be headed for recession because of the lingering effects on the global economy from the coronavirus.
The common currency fell to the weakest since 2017 versus the dollar Wednesday, and to levels last seen in 2016 against the Swiss franc. It sank as much as 0.5% to $1.0865. Concern about German Chancellor Angela Merkel’s succession plans and a dovish European Central Bank have weighed on the euro, which investors are looking to as a vehicle to fund riskier positions. The S&P 500 Index rose to a record in New York as the euro sank.
Deutsche Bank AG (DE:DBKGn) now expects a slight contraction for Germany in the fourth quarter as the virus exacerbates an industrial slump. Euro-area industrial output posted the steepest drop in almost four years at the end of 2019, data showed Wednesday.
“The narrative of slowing economic activity is key and today’s industrial production data is key,” said Monex Europe currency analyst Simon Harvey. “Many are suggesting further easing may be on the horizon. Combine this with the easing risk climate, and the euro seems to be suffering as the funding currency.”
Traders are dialing up expectations that the ECB may need to lower rates to counter the economic fallout from the coronavirus. Money markets are pricing in around six basis points of a cut by end-2020, versus a zero chance of easing a month earlier. Credit Agricole (PA:CAGR) downgraded its forecast on the shared currency Wednesday, following similar moves by JPMorgan Chase (NYSE:JPM) & Co. and RBC Capital Markets last week.
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Fourth-quarter growth data for Germany are set for release Friday. While the median prediction is for 0.1% quarterly growth, almost 30% of survey respondents forecast a contraction.
“Persistently weak growth will keep pressure on the ECB to deliver further easing, posing downside risks for the euro which is already weakening in anticipation of potential policy action,” said Lee Hardman, a foreign-exchange strategist at MUFG Bank Ltd. in London.
Still, even with the euro down about 3% against the dollar in 2020, a majority of forecasters still predict it will strengthen by the end of the year. The median estimate in a Bloomberg survey is for the euro to trade at $1.14 in the fourth quarter.
