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By Bloomberg

With inflation back on the agenda, euro bears are losing faith in their predictions for the single currency really to fall to parity -- or beyond -- with the dollar.

The euro has jumped 2.6 percent this week to $1.1269 in a rally that included the biggest two-day gain since 2009 and accelerated after European Central Bank President Mario Draghi said price growth was returning to the economy. Rabobank Group and Mizuho Financial Group Inc. boosted their year-end forecasts this week to $1.06 and $1.11, from previous estimates of $1.05.

“We’ve become less bearish on the euro,” said Nick Parsons, London-based head of research at National Australia Bank Ltd., which raised its year-end estimate to $1.03 about three weeks ago, after previously forecasting parity. “There are clear signs that economic activity and inflation are picking up. Short positions against the euro have been very stretched.”

Draghi’s comments on Wednesday, a day after a euro-zone inflation report showed the first price increases in six months, sparked a jump in the region’s bond yields that boosted demand for its currency. The news also re-opened the debate as to whether the ECB will abandon the record stimulus that has caused the euro to weaken 18 percent in the past year.

‘Unrealistically Pessimistic’

The euro has climbed from a 12-year low of $1.0458 on March 16. Until then, it had been dropping almost continuously since May last year and at one point had weakened 25 percent versus the dollar. The single currency touched an almost three-week high of $1.1380 on Thursday amid a volatile day for global markets.

“What we’re getting is an unwind of expectations that were unrealistically pessimistic at the beginning of the year,” said Steven Englander, global head of Group-of-10 currency strategy at Citigroup Inc. in New York. “I don’t think it necessarily means the end of euro weakness. They still have a need to stimulate their economy. They may need the weaker currency as a crutch.”

The world’s biggest currency trader raised its year-end euro forecast to parity in late-April, from 93 U.S. cents previously.

Options traders have also become less bearish on the single currency. The premium on three-month contracts to sell the euro over those to buy was 2.1 percentage points, risk-reversal prices compiled by Bloomberg show. That’s down from an almost two-month high, based on closing levels, of 2.3 on May 25.

Wells Fargo & Co. raised its December forecast for the European currency to $1.08 last month, after predicting a drop to parity earlier in the year.

“The latest inflation data was positive for the first time in months,” said Eric Viloria, a foreign-exchange strategist at the company in New York. “That helped to push German yields higher and provided support for the euro.”