Tags: gross | euro | overvalued

Bill Gross: Euro Overvalued by 30 Percent

Thursday, 17 Jul 2008 11:53 AM

While the dollar has dropped to yet another record low against the euro, the greenback will recover in coming months, according to superstar money manager Bill Gross and other heavyweights.

Rising European interest rates have pushed the euro up nearly 35 percent against the dollar over the past three years, to a high of $1.60.

But a growing number of experts believe the economies of Europe will slump even further than the U.S., forcing the European Central Bank to reverse this month's interest-rate increase.

The euro will slip about 6.5 percent to $1.50 by year-end and then slide further to $1.45 by the middle of next year, according to the median of 37 currency analysts surveyed by Bloomberg News.

Gross, co-CEO of Pacific Investment Management Co. (Pimco), has turned bearish on the euro for the first time since the common European currency was created in 1999. Pimco runs the world's largest bond fund.

"We might have hit a point where the euro doesn't have a lot to stand on," Emanuele Ravano, co-head of European strategy for Pimco, tells Bloomberg.

"The euro is ultimately very overvalued. It could be quite a bit lower at some point over the next couple years."

Indeed, based on purchasing power parity, the euro is 30 percent overvalued against the dollar, according to the bond fund. Purchasing power parity means that $1 would buy the same amount of goods and services in the U.S. as its rate in euros would buy in Europe.

"When a currency gets between 25 and 30 percent overvalued, it tends" to revert to the mean, Ravano says. He says a euro drop to $1.5350 is in order.

The Economist's Big Mac Index, which measures purchasing power parity for the purchase of the McDonald's signature hamburger, points to the euro being 22 percent overvalued against the dollar.

As for economic growth, the 15 countries sharing the euro will produce an expansion of 1.4 percent next year, down from 1.7 percent in 2008, according to the median forecast of a Bloomberg survey.

The median U.S. estimate shows growth accelerating to 1.8 percent in 2009 from 1.5 percent this year.

French President Nicolas Sarkozy already has complained that the euro's strength is hurting European exports and could restrain economic growth. Exports from Germany, the continent's largest economy, plunged 3.2 percent in May, the most in four years.

"We're not far off the capitulation point for the euro," says Mitul Kotecha, head of foreign exchange research in London for the investment-banking unit of Credit Agricole.

He predicts the euro will drop to $1.52 by Sept. 30, and $1.45 by next April.

Falling European interest rates will drive the euro lower, experts say. The median forecast in a Bloomberg survey of economists suggests that the ECB will cut its key rate by 25 basis points to 4 percent by the middle of next year.

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While the dollar has dropped to yet another record low against the euro, the greenback will recover in coming months, according to superstar money manager Bill Gross and other heavyweights.Rising European interest rates have pushed the euro up nearly 35 percent against the...
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