Euro Will Drop to $1.19 by Next Year on Greece Crisis, BNP Says

The euro will drop by the middle of next year to $1.19, a level last seen in March 2006, as government debt forces the European Central Bank to keep benchmark rates at record lows, according to BNP Paribas SA.

The 16-nation currency has fallen 4.6 percent versus the dollar this year on concern Greece will be unable to finance a budget deficit that is more than four times the European Union’s limit of 3 percent of gross domestic product. The median forecast of analysts in a Bloomberg survey is for the euro to trade at $1.33 in 2011.

“A program of severe fiscal consolidation is required, which will result in significant deflationary pressure,” currency strategists at BNP Paribas wrote in a note to clients today. “The ECB is still a long way from hiking interest rates, with a rise in the refinancing rate from the current 1 percent unlikely until the second half of 2011.”

The common currency rose to a three-week high of $1.3692 on April 12 after European governments offered Greece over the weekend a rescue package worth as much as 45 billion euros ($61 billion).

Germany’s parliament will probably be given a vote on any financial aid for Greece, the Finance Ministry said today, risking a showdown with lawmakers. Greek Prime Minister George Papandreou may be forced to activate the emergency-aid package within two weeks, Fitch Ratings Director Christopher Pryce said.

“We expect any euro recovery to remain limited,” the BNP analysts wrote. “Many uncertainties regarding the aid package for Greece remain, which is likely to keep international investors cautious about committing funds to European asset markets.”

The ECB will raise its benchmark interest rate by a quarter-percentage point to 1.25 percent during the first quarter of 2011, according to the weighted average of economists in a Bloomberg survey. The Federal Reserve will boost its target by the same amount in the third quarter of 2010, according to the weighted average in a separate Bloomberg survey.