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Foreign Exchange

FX research roundup: The end of the decade

The last real trading day of the decade and, despite this morning’s downgrade of Ireland, the only piece of real data should ensure that the euro sees the Noughties out at least semi-positively: December’s IFO business climate has reported its highest level – 109.9 – since German re-unification.

We’ll give a summary next week of the 2011 FX outlooks, but it is already apparent that there has been a shift in perception of whether EUR or USD will win next year’s ugly contest.

Only a few weeks ago, with Ireland at centre stage, many commentators thought there would be further EUR weakness. And this might be the case in the short-term, especially while uncertainty about the upcoming Irish election and concerns about Iberia hold sway.

Paul Robinson at Barclays Capital certainly sees it like that, predicting that EUR/USD will sell off slightly to 1.28 but will end the year at 1.42. He argues that there might be disagreements within Europe over the appropriate policy response – particularly on eurozone bonds – but, unlike during the Greek crisis, the authorities seem willing to countenance forthright action.

Bullish USD views under pressure now that the extension to Dubya’s tax cuts has passed Congress and the back up in longer-term US yields threaten a property market already on its knees. Morgan Stanley, with an end-2011 prediction for EUR/USD of 1.20 is one of the few sticking to the view that EUR will be uglier than USD.

Meanwhile other US banks see the dollar’s prospects as distinctly unpretty: Citi’s 2011 outlook, published back at the end of November calls for EUR/USD to end 2011 at 1.44 and JPMorgan sees it up at 1.48: one thing’s for sure – 2011 is not going to be a quiet one for the world’s most traded currency pair.

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