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UBS says euro's long-term rally versus dollar nearing an end

UBS AG said the euro's five-year rally against the dollar may be peaking as the trade deficit in the world's largest economy becomes less of a drag on the US currency.

„The long-term rally” in the euro „is coming to an end,” Mansoor Mohi-Uddin, global head of foreign exchange strategy for Zurich-based UBS AG, wrote in a research note yesterday. „Risk and reward now favors selling” the euro. UBS, Europe's largest bank by assets, also said central banks will also buy the euro less aggressively as they diversify their foreign reserves. The European currency gained 0.1% yesterday to $1.3237.

The euro gained versus the dollar in four of the past five years, rising from 88.95 US cents at the end of 2001. The 13-nation currency has benefited from a record trade deficit in the US and central banks boosting their euro holdings. They are now becoming less supportive for the euro, according to the UBS report. Mohi-Uddin was not available for comment. The US trade deficit narrowed in January to $59.1 billion, the Commerce Department said on March 9. It was down from a record $68.9 billion in August. A narrowing trade deficit reduces the outflow of the currency.

Citigroup Inc., the biggest US bank, pared its forecast yesterday for how much the euro will decline within three months, while maintaining its bet the European currency will slump to $1.24 in a year. The euro will drop to $1.30 in a month and $1.28 in three months, Citigroup said in a research note. The New York-based bank had previously forecast the euro would fall to $1.28 in a month and $1.26 in three months. Citigroup reduced its prediction for the dollar's gain as investors bet the Federal Reserve will cut borrowing costs to sustain the economy. The „economic pessimism should reverse” and lend the „renewed support” to the dollar, Citigroup's currency strategists Steve Saywell in London and Todd Elmer in New York wrote. (Bloomberg)