LONDON (Mar 19): HSBC went against the overwhelming consensus for euro weakness on Thursday by raising its euro forecast to $1.20 by the end of 2017, arguing that the dollar's explosive rally was nearing its end.
It is the most contrarian call on the single currency from any major bank and comes after many slashed their forecasts, predicting a break below parity with the dollar and in some cases a record low.
The pace of the euro's fall, overwhelmingly one-sided market positioning, stretched valuations, and signs the strong dollar is beginning to have a negative effect on world markets and unnerve U.S. officials were reasons for the call, said David Bloom, HSBC's global head of currency strategy.
"It's been a great party, but we're dancing near the door now. We've had a brilliant time, but it's time to go home," he said. "It's difficult to go against the pack ... but everyone has gone too far, too fast."
The euro has lost around a quarter of its value against the dollar since last May, hitting a 12-year low below $1.05 this week, a move largely driven by the divergent policy paths of the Federal Reserve and European Central Bank.
The Fed has ended its quantitative easing bond-buying stimulus and spent months preparing the ground for its first interest rate hike since 2006, while the ECB has launched a 1.1 trillion euro QE programme to fight off deflation.
HSBC said the euro would rise to $1.10 next year, compared with its previous forecast of $1.05, then to $1.20 at some point in 2017.
Last week, U.S. investment bank Goldman Sachs slashed its forecasts for the single currency to $0.95 in a year and $0.80, which would be a new low, by the end of 2017.
Germany's biggest lender and the world's second largest currency trader Deutsche Bank also cut its euro forecasts last week, predicting a fall to parity by the end of this year and to $0.85 by 2017.
The euro was trading at $1.0655 on Thursday, down almost 2 percent on the day. On Wednesday it reached a high of $1.10625 after the Fed surprised with a policy statement that suggested its first rate hike won't come as soon as the market expected.
Fed Chair Janet Yellen alluded to the dollar's strength on Wednesday, saying it is compressing inflation "at least on a transitory basis" and could exert a "notable drag" on U.S. exports this year.
HSBC's Bloom said any further strength in the dollar from here would likely be "dark and destructive" for global equity markets, commodities, emerging market and other central banks' policymaking.
"The dollar's strength up to now has been constructive and good for the world as it has allowed other countries to export their deflation. But the sweet spot is over," he said.