Euro equals $1: 3 ways UAE expats will win

Several global banks, including Bank of America-Merrill Lynch (BofA-ML) and Goldman Sachs, have revised their euro forecasts, and said in new reports that they sees parity (an exchange rate of 1:1) between the euro and the US dollar within six months.

“We update our forecast to 1.02, 1.00 and 0.95 in 3, 6 and 12 months (from 1.12, 1.10 and 1.08 previously), as well as 0.85 and 0.80 at end­ 2016 and end­ 2017 (from 1.00 and 0.90), respectively,” Goldman Sachs’ Robin Brooks wrote in a note to investors on Friday.

“We have been bearish EUR, but it now turns out that we have not been bearish enough,” BofA-ML said in its latest FX Viewpoint report published yesterday. “We are revising our end-2015 EUR/USD projection to 1.0 from 1.10 (and our end-2016 projection to 1.0 from 1.05),” it noted.

This suggests that Goldman Sachs and BofA-ML see the euro trading at or even below $1 within six months’ time. Considering the sharp decline that the European currency has seen over the past few months, that forecast sounds bullish for the euro, if there indeed can be such a thing.

For, the euro/dollar is currently trading at a fresh 13-year low of €1/$1.04575, down 24.9 per cent from a year ago, when the exchange rate on March 18 touched €1/$1.39306, a 30-month high at the time.

Since then, however, the beleaguered euro has shed about a quarter (24.93 per cent) of its value in one year, of which more than half – more than 13 per cent – was shed in a little over 10 weeks this year so far.

The BofA-ML report does recognise this steep decline, and says its end-2015 parity forecast could come true earlier. “We are revising our EUR/USD projections, expecting parity by the end of 2015. The current trend poses negative risks to our projections, as EUR/USD could reach parity in 2Q if this pace continues,” it notes.

“However, further USD appreciation could also raise concerns about the US recovery, possibly affecting the Fed’s timing and pace of tightening and posing positive risks to our projections,” it adds.

Looking back historically, the euro was launched in January 1999, and was last at parity with the dollar in late 2002. But it gained strength on the back of a strong European economy, and registered a high of €1/$1.59752 in April 2008.

Six years on, it’s a beaten and battered euro that analysts believe has still not seen its worst. “For now, we expect it to stay at parity in 2016, although a lot will depend on whether the ECB will introduce QE2 after September 2016, or not,” says BofA-ML.

“If Eurozone data improves and QE is not needed after September, this will be bullish for the euro. However, if the data is weak and the ECB needs QE for one more year, this will be bearish for the euro. At this point, it is too early to tell,” it adds.

With the US dollar continually gaining strength, especially over the past one year, here are 5 ways we in the UAE, which has a dollar-linked currency, will be impacted by the euro-dollar movements.

#1 Hello BMW, Mercedes. European cars, especially German ones like BMW, Mercedes, Volkswagen and Audi are very popular here in the UAE, and a weaker euro will mean that, theoretically, we will have to spend less dirhams to purchase European car brands. Not just cars, but all European imports into the UAE, like meat, agricultural products, etc. should become cheaper for UAE residents.

#2 Bienvenue à Paris. Travel to European destinations – think Paris, Budapest, Berlin, Rome, Milan, Vienna…, the list is endless – will become cheaper, and not just because low global oil prices will mean that airfares will be cheaper, but because hotel stays, shopping and eating out in Europe (priced in euros) will be less expensive for those paying in dollars/dirhams.

#3 Fashion for less. Italian and French fashion brands will (should) become less expensive for us here in Dubai and the rest if the UAE, considering they are priced in euros. Not just fashion, German engineering products, Greek olive oil, and Finnish phones (Nokia), among a host of other products, should get cheaper.
 

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