LONDON (Reuters) - The euro could follow the yen as the next major currency to decline against the dollar, hurt by easier monetary policy and a lack of structural reforms, an official at a leading currency fund manager said on Monday.
James Wood-Collins, chief executive officer of Record Currency Management also told the Reuters FX summit the “existential threat” to the euro was not over.
“Earlier this year, we had the theme of currency wars ... We feel that after the yen the currency where you have the greatest scope for continued depreciation amongst the majors would be the euro,” he said.
Wood-Collins said the euro could lose its advantage in terms of interest rate differentials, while the European Central Bank had room for outright monetary expansion through quantitative easing.
The ECB’s key refinancing rate stands at a record low 0.75 percent but its president, Mario Draghi, said after its latest policy meeting the bank stood “ready to act” to boost the recession-hit euro zone.
“And you’ve probably got a greater overvaluation case for the euro against the dollar,” Wood-Collins said.
The world’s major central banks, including the U.S. Federal Reserve, the Bank of Japan and the Bank of England have all launched asset-purchase programs after interest rates were slashed to near zero to jump-start their economies.
Such programs, known as quantitative easing, increase the supply of a currency, generally pushing it lower. And while the Fed, the BOJ and the BoE have all pumped in more money, the ECB’s balance sheet has been contracting as banks repay loans taken last year and in 2011 to tide them over the debt crisis.
Earlier this year, expectations the BOJ would unleash trillions of newly printed yen to drag Japan out of deflation saw the currency weaken sharply. This led to cries of protest from euro zone officials who were worried that a strong euro would hurt exports and push the economy deeper into recession.
Japan’s aggressive easing policy sparked talk of a renewed “currency war” and saw the euro jump to three-year highs against the yen. It is still up nearly 14 percent against the yen in 2013.
Many investors have become more positive on the euro since ECB President Mario Draghi’s pledge to do “whatever it takes” to preserve the euro and a subsequent plan to buy the bonds of countries in trouble.
But Wood-Collins said the “existential risks” to the euro from the debt crisis had not disappeared and, if anything, the lack of fiscal and banking union would hamper the euro’s prospects.
“Commitment to do whatever it takes is all well and good, and clearly it has given the market a significant degree of reassurance, but there are still big gaps in terms of the structural reforms that are required,” he said.
He said Record, which has $35 billion worth of assets under management, ran a euro stress fund from May 2011 that was aimed at exploiting the view that the euro faced alternating periods of heightened euro zone fears and periods of relative calm when investors had greater risk appetite.
But the fund was closed in September 2012. Woods-Collins attributed the lack of success to the fact that euro zone tension played out most in sovereign bond spreads and credit default swaps rather than the currency itself.
Wood-Collins said signs were emerging that the dollar could be nearing the end of a long-term decline. If this became more of a trend it could lead to more hedging by U.S. investors who buy overseas assets, he said.
Record manages currency exposures for largely institutional clients based in the UK, Europe and United States including pension funds and corporate clients.
He said the long-held view among U.S. investors was that the dollar was in a long-term decline, but the euro zone crisis had caused them to question this.
“Over most of the last 11 years or so, the dollar broadly speaking has been weak and that means people have got used to making money out of being short the dollar in their portfolios.
“That isn’t true of the last nine months or so. If this becomes a new trend of a strengthening dollar that will probably be the biggest single catalyst for U.S. investors to undertake more hedging,” Wood-Collins said.
The dollar index .DXY has fallen nearly 25 percent since the start of 2001, but has risen 3.8 percent so far this year, driven mainly by its gains against the yen on the back of some signs that the U.S. economy was picking up and lead the Fed to end its asset purchase program sooner than expected.
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Editing by Nigel Stephenson