Is the euro out of the woods?

The euro has recouped a little ground over the past week. The currency’s bounce has coincided with a tentative rally in equity markets, which probably reflects a sense of relief that the global fall-out from Europe’s fiscal crisis has not been worse. (See Chart 1.) But we doubt the improvement in sentiment will last. The crisis is far from over, as a renewed rise in bond yields in a number of troubled countries attests. Our forecast for the euro against the dollar remains 1.10 by the end of this year and parity by next summer.