(Bloomberg) -- Investors who are selling down the euro are ignoring how cheap the currency is, according to MUFG.
The shared currency is trading near its weakest levels in three months as Italy enters recession and Germany teeters on the brink. Still, the currency is the most undervalued among the Group-of-10 basket of exchange rates, based on the OECD’s measure of purchasing-power parity.
The U.S. Federal Reserve could display a more dovish bent when its minutes are published Wednesday, while the European Central Bank can only confirm its already downbeat outlook when President Mario Draghi speaks Friday, which could tip the balance in favor of the euro, according to MUFG.
“The euro is relatively undervalued against the dollar at these levels,” said Fritz Louw, an analyst at MUFG. “To some extent based on the possibility that recent euro-zone weakness is driven by potentially transitory factors and further that the Fed has made quite a shift in recent weeks on their rate guidance.”
A pause in the Fed’s hiking cycle would mark more of a dramatic shift than the ECB confirming its dovish view as traders have already priced in the latter, Louw said.
The euro advanced 0.3 percent to $1.1327 on Monday, less than 1 percent stronger than a low of $1.1216 in November. MUFG sees the euro gaining to $1.1700 by the second quarter and to $1.1900 by the third.
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