Strong expectations for euro parity despite setback

The euro lost ground in its continuing attempt to breach dollar parity yesterday, as markets paused in anticipation of Thursday's Independence Day holiday in the US.

Falling back from a high of $0.997 early in the day, the European currency steadied around $0.987 late in the afternoon, held back in part by residual market reaction to last Friday's Japanese monetary intervention to take pressure off the yen.

The intervention has "put a floor under the dollar" for a few days, according to Mr Oliver Mangan, chief bond economist with AIB.

US treasury secretary Mr Paul O'Neill confirmed yesterday that the Federal Reserve had intervened on behalf of the Japanese government at the end of last week.

Mr O'Neill said he was "agnostic" on the intervention issue.

"Governments need to do what they believe is the right thing for them," he said.

Despite the latest setback in the euro's progress, expectations remain strong that a breach of dollar parity is inevitable in the short term. "The momentum is very much against the dollar," said Mr Mangan.

He also argues that investors will continue to shy away from US investments as corporate news remains gloomy, thus placing unwanted attention on the growing US trade deficit.

"I can't really see overseas investors taking up US assets in coming months," he said.

Mr Mangan believes that parity could be broken in coming days, with the euro moving to $1.05 thereafter.

Mr Colin Hunt, head of research at Goodbody Stockbrokers, is less confident of the euro's staying power, predicting that the dollar will begin to gain ground as soon as the stream of negative US corporate news comes to an end.

"I would argue that in order to sustain its recent appreciation, the euro needs to see an ongoing flow of bad news from the US," said Mr Hunt.

"It currently has the momentum to break parity and stay there for a number of weeks but I think that the medium-term fundamentals favour the dollar."

Within three months, the euro could fall back as far $0.95, according to Mr Hunt.