Euro/Dollar Parity— What's Next?

Recently there has been a lot of speculation about whether or not the dollar and euro will trade equally in the coming months. The divergence in policy between the US Federal Reserve and the European Central Bank has contributed to the euro's sharp decline and the dollar's rally, but disappointing economic figures out of the US caused many traders to step back and reevaluate whether or not parity is on the horizon. Dollar Rally Nearing Its End? In March, the Fed indicated that it was in no hurry to raise rates, causing many to revise their estimates for when the bank would increase its ultra low borrowing rate. Additionally, the dollar has lost some of its momentum over the past week after economic data suggested that the US recovery may not be as rock-solid as initially believed. A durable goods report showed that new orders fizzled in February, causing investors to further question whether or not the Fed would consider a rate hike any time soon. Dollar Reserves Telling With the euro trading at $1.0849 on Monday morning, all eyes are on the International Monetary Fund as it prepares to release its Cofer for Currency Composition of Official Foreign Exchange Reserves on Tuesday. The report will detail foreign exchange holdings for central banks around the world in the last quarter of 2014. An increase in dollar reserves, which is what most expect to see, would likely drive the dollar higher and push the exchange rate closer to one to one ratio. Predictions Divided Analysts are divided as to whether or not the dollar will reach parity with the euro. HSBC predicted that the dollar rally was nearly over saying that the greenback has become severely overvalued. Former IMF and Fed economist Stephen Jen is forecasting the opposite, saying that the two could reach parity by May or June. Barclays is also betting on a one to one ratio this year, with their analysts expecting to see the euro dip below parity with the dollar in the third quarter of this year.