European Central Bank President Mario Draghi’s suggestion that there is room for paring stimulus has pushed the U.S.-German yield spread below a multi-year support level, signaling further gains in the euro, according to Mizuho Bank Ltd.
A narrower U.S. yield advantage over bunds will help lift the euro-dollar higher, according to Daisuke Karakama, Mizuho’s chief market economist in Tokyo.
Bund yields rose 13 basis points on Tuesday’s comments to 37 basis points, the biggest jump since December 2015. The difference in yield to 10-year U.S. Treasuries dropped to 184 basis points, the lowest since November. The euro rose 0.2 percent Wednesday to $1.1365, extending Tuesday’s 1.4 percent gain.
“The ECB is more likely to scale down monetary easing, which will cause euro buying,” said Karakama. “I expect the Fed’s policy normalization will overkill the economy and eventually stall. The dollar will be sold off and the euro will rise accordingly.”
Karakama forecasts the euro will strengthen to about $1.17 by the year-end. That compares to an median forecast of $1.12, according to analysts surveyed by Bloomberg.