Euro/Dollar to Reach 1.10, Greece to Return to Drachma?

With economic and political turmoil escalating further across Europe this past weekend, several market strategists and policymakers recently weighed in with their predictions on a host of sovereign debt-related issues.

Analysts at UBS published a report (via Zero Hedge) detailing their dire forecast for the euro currency, which they see falling to 1.15 against the U.S. dollar by year-end and to 1.10 by the end of 2013. “The euro has depreciated to its lowest level in nearly nine years when measured in trade-weighted terms,” the firm wrote. “Clients have asked if this might trigger a GDP forecast upgrade for the common currency area. The short answer is no; the currency has depreciated on fear and risk aversion – and economic growth tends to suffer rather than flourish in that environment.”

UBS went on to say that “This evaporation of confidence in parts of the European banking sector has a direct impact on the real economy, including through a higher cost of capital for companies and from tougher credit conditions for loans. The Spanish, Italian, Greek and Portuguese economies are in recession, and growth in the eurozone as a whole has ground to a halt.”

In Germany, Alexander Dobrindt – general secretary of the Christian Social Union (CSU), the sister party of Chancellor Angela Merkel’s Christian Democrats (CDU) – stated in comments to the daily Die Welt that “With Greece we have reached the end of the road. There must not be any further aid. A country which does not have the will to fulfill the conditions, or is not able to do so, must get a chance outside the euro.”

Dobrindt added that “Greece should start to pay half of its civil service wages, pensions and other expenditures in drachmas now.  A soft return to the old currency is better for Greece than a drastic move. Having the drachma as a parallel currency would allow the chance for economic growth to develop.”

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