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Pimco's Mather: Euro's Plunge To $1 Not Out Of Question


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Pimco's Mather: Euro's Plunge To $1 Not Out Of Question

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Here's a bold call from global bond investment behemoth Pacific Investment Management Co: the euro could get as low as one dollar during 2012.

The forecast, which implies another 23% decline in the European currency, comes from Scott Mather, head of global bond portfolio management at Newport Beach, Calif.-based Pimco, and it comes amid renewed selling pressure on the euro Wednesday. The euro dipped below $1.30 Wednesday as doubts continued to grow about the efficacy of last week's political deal to solve the euro zone's debt crisis.

"Parity with dollar next year is not out of the question," said Mather in a phone interview Wednesday. "I am more bearish on the euro now than three months ago."

With over $1 trillion assets globally under management, Pimco is one of the world's biggest asset management firms and includes the world's biggest bond fund in its stable.

Mather said in an interview in September that he expected the euro to dip to $1.20 by the end of the first quarter of 2012. With the euro last trading 0.3% lower around $1.30 on Wednesday, the currency is moving toward his target.

But Mather's latest call ups the ante. He says things in the euro zone have deteriorated, opening the possibility that the selloff in the euro could be much deeper than he previously thought.

Deutsche Bank, the world's biggest currency trading bank and UBS, the third-largest currency trading bank, both expect the euro to drop to $1.25 by the end of next year.

Mather said "there are lots of ways" to get the euro to one dollar, including a severe economic recession, a breakup of the euro zone, or defaults on debt by euro-zone countries other than Greece. "Nothing is sure but the euro should have a substantially higher risk premium," he said.

Mather said the euro could have a relief rally if the European Central Bank adopts a "quantitative easing" approach and buys Italian and Spanish bonds on a massive and unlimited scale. But the euro's bounce could be short-lived as that policy shift, tantamount to printing new money--could hurt the euro in the longer term.

Selling the euro and buying the dollar is one way to bet on the turmoil continuing, but Mather said another trade is to sell the Hungarian forint against the dollar, given Hungary's economic and financial links with the euro zone.

Mather said that buying the safe-haven dollar is his favorite bet over the next three to six months, as he believes the euro zone's woes would hurt the global economic outlook. The pickup in risk aversion could also hurt many higher-yielding currencies such as the Australian dollar and currencies in many emerging-market nations in Asia.

However, over the longer-term, he has a bearish view of the U.S. dollar due to the U.S.'s own fiscal problems.

Addressing another favored safe-haven currency for investors fleeing from euros, Mather puts less than 20% odds on the Swiss National Bank raising its floor for the euro versus the Swiss franc to CHF1.25 from the current level of CHF1.20.

"Why would the SNB upset the equilibrium at this point?" said Mather, adding that the SNB can opt to keep its powder dry and will intervene if the franc moves sharply higher.


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December 14, 2011


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