Experts predict euro recovery

THE battered euro is set to claw back lost ground in coming months, analysts believe. They say speculation over the future of the single currency will die down and the focus will switch back to the global slowdown and to America's yawning current account and budget deficits, putting fresh pressure on the dollar.

The prospect of further euro weakness over the summer cannot be ruled out, however.

The past few weeks have seen a dramatic slide in the euro as France and the Netherlands emphatically rejected the EU constitution, sending it to eight-month lows below $1.22, down seven cents on a month ago. Against sterling, it has dropped about 1p to around 67p.

It was further undermined by reports that top German officials had secretly discussed dumping the single currency. The European crisis escalated further when Italian welfare minister Roberto Maroni said the country should consider quitting the euro and reintroducing the lira.

But analysts have dismissed talk of the break-up of the 12 nation bloc as driven by eurosceptics with an axe to grind. 'The idea that a debt-laden country like Italy could leave the eurozone is laughable,' said Nick Parsons, head of research at Commerzbank in London. 'Talk of the demise of the euro is ill-informed comment that confuses economics with politics. The euro will continue to exist.'

Nevertheless, recent events are undoubtedly a setback in the euro's quest to become a fully-fledged reserve currency on a par with the mighty greenback. Central banks, which have increased their holdings of euro from 12% in 1999 to 20% in 2004, are expected to slow the process in response to heightened political risk, a move that will weigh on the single currency.

David Bloom, currency analyst at HSBC, reckons it will now take until 2020 for the euro to achieve reserve currency status, five years longer than previously thought. He calculates that the delay should drag the euro about four cents lower. Given that it is down almost twice that over the past month, Bloom believes the market has overshot.

'The market is trading on raw emotion right now, but we expect the euro to be back at $1.35 by the end of the year,' he said.

Other experts believe gains will be limited by weak growth in the eurozone, not least because the unwieldy EU could struggle to push through supply-side reforms. On average, analysts see the euro at $1.22 in one month, $1.24 in three months and $1.27 in a year's time, according to a Reuters poll.