Euro Will Soon Start Losing Support. By Nicholas Hastings

Euro bulls must be starting to get worried.

Over the last week or more, global risk appetite has improved, equities have rallied and even crude oil prices have risen as strong second-quarter earnings from the U.S. have lifted hopes for the global economy.

However, the euro's performance against the dollar has hardly been stellar.

On the contrary, the single currency has looked pretty moribund, failing to get enough momentum to break through resistance at $1.43.

 


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Sure, more speculators have taken up long futures positions in the euro with the latest data from the IMM in Chicago showing that both long euro and short dollar positions had doubled in the week to last Tuesday.

However, this only means that there will be more people out there selling the euro if sentiment turns and the single currency heads down.

And that is where the risk lies.

The second-quarter corporate earnings season is set to continue but the emphasis now will be more on European rather than U.S. companies, most of which have already reported. Given the less robust state of the euro-zone economy, European results are hardly likely to match the strength of the U.S. results, 82% of which were above market expectations.

Some analysts argue that portfolio adjustments to preserve the proportion of exposure to U.S. and underperforming European companies could mean an increase in demand for the euro. But this is hardly likely to have much impact if the results themselves start to erode the recent improvement in global risk appetite.

Upcoming economic data could also prove disappointing.

Recent business and consumer sentiment surveys from the euro zone have been better than expected and the U.S. housing market has showed signs of buoyancy.

However, there is little in the way of major data this week to continue feeding this optimism over the recovery.

If anything, the focus could be largely on U.S. second-quarter gross domestic product numbers Friday, widely expected to show a sharp 1.5% contraction.

Of course, there is also a potential boost for the euro against the dollar from China as the country holds high-level talks in Washington. Any suggestion that Beijing is worried about the dollar's strength and wants to continue diversifying its foreign exchange reserves will certainly play into the euro's hands.

But there is a good chance that diversification is no longer the major issue it once was.

"We expect China to diplomatically voice concerns over the value of the dollar but at this stage both sides appear content with the status quo and are keen not to disrupt markets while the world economy is still fragile," said Gareth Barry, a currency strategist with UBS in London.

This is another reason why support for the euro may start to ebb, leaving the currency vulnerable to a correction as euro bulls lose their patience and start selling.

The euro was once again failing to make it over $1.43 early Tuesday in Europe even though risk appetite had been boosted overnight by hawkish comments from Reserve Bank of Australia Governor Glenn Stevens suggesting that Australia will be pulling out of recession fairly soon. Sentiment was also helped by strong new home sales from the U.S. Monday as well as by much better than expected results from Deutsche Bank early Tuesday.

By 0645 GMT, the euro had risen to $1.4276 from $1.4233 late Monday in New York, according to EBS. It was also up at Y135.81 from Y135.49. The dollar was a little lower at Y95.10 from Y95.19.