World Trade Source

9/03/2010

The pound’s drop last week to a 10- month low may help the U.K. economy grow faster than the region sharing the euro, which is hobbled by budget deficits and aging populations, according to Goldman Sachs Group Inc.

Concerns U.K. elections this year may give the nation its first minority government since 1974 helped drive down sterling by 7 percent since Dec. 31, the worst performer this year among the 16 most-traded currencies. The euro is still trading about 10 percent above its fair value against the dollar, said Erik F. Nielsen, Goldman Sachs chief European economist.

“People are very bearish on the U.K., probably more than they should be,” Nielsen said in an interview in Sydney yesterday. “The euro is clearly in its biggest crisis since it started, so it’s kind of strange that it’s overvalued.”

The pound dropped to $1.4784 on March 1, the weakest since May 1, 2009, and bought $1.5009 as of 10:37 a.m. in Tokyo. It reached a three-month low of 91.497 pence versus the euro on March 1 and traded at 90.733 pence today.

Sterling posted its third weekly decline against the euro and U.S. currency in the five days ended March 5 as opinion polls stoked concern the U.K. may elect a minority government, hampering efforts to accelerate the economy’s recovery and control a record budget deficit. National elections must be held by June.

At more than 12 percent of gross domestic product, the U.K. budget shortfall is on a par with that of Greece.

Budget Gap, Expansion

Britain’s economy grew 0.3 percent in the fourth quarter, ending the deepest recession on record, and inflation accelerated to a 14-month high of 3.5 percent in January.

“We think the U.K will outperform the euro-zone in growth terms,” Nielsen said. “We have a constructive forecast for sterling.”

The pound will rise to $1.73 in six months, the bank said in a Feb. 10 report. Goldman Sachs lowered its forecast for the euro to $1.45 over three and six months and last month said it will trade at $1.35 by February 2011.

There is a “permanently higher risk premium on investments in the euro-zone and on the euro,” after Greece’s fiscal concerns, Goldman Sachs said in the report.

Euro Parity

The euro could undershoot its so-called fair value of $1.23 and reach parity with the dollar “sometime over the next few years,” Nielsen wrote in an e-mailed note March 7. “If the euro could overshoot fair value of 1.23 by some 22 percent, why can’t it undershoot it by some 22 percent?”

Goldman on March 2 pushed back its forecast for the European Central Bank’s first rate increase into 2011 from the fourth quarter of this year, and said policy makers will exit non-standard measures more slowly than previously anticipated.

On March 4, the ECB kept borrowing costs at a record low of 1 percent and said it would phase out some of the emergency tools used to fight the global financial crisis.

Further problems in Southern Europe or within the banking industry could “easily lead to a slowdown” in the ECB’s exit strategy, Nielsen said. “One has to be very brave to have a bullish view on the euro.”

Source -- Bloomberg