Euro Fall Is Looking Inevitable. By Nicholas Hastings
Even the euro bulls are losing heart - forecasting that a fall in the single currency against the dollar is now nearly inevitable.
At least two major drags on the dollar - risk correlation and fears of reserve diversification - are fading.
At the same time, concerns over the euro are rising, with euro-zone banks becoming increasingly vulnerable to failure, as suggested by the recent loss estimates produced by the European Central Bank.
"Autumn might be crunch time as by then we will see the current economic rebound running out of steam, spreads widening again, asset volatility increasing and equities declining," said Hans Redeker, head of global foreign exchange strategy at BNP Paribas in London.
Although Redeker doesn't see an immediate sell-off in the euro, he certainly sees one coming.
"For now, the euro might enjoy its last hurrah, but in the autumn this currency will be in retreat and we suggest it might be a big one," he said.
Chances are the retreat against the dollar could come even sooner.
First, the dollar's outlook is improving.
Over the last month or two, the dollar has generally suffered at times when optimism over the global recovery has risen, equities have rallied and risk appetite has increased.
Shunning the dollar's essentially safe haven status, investors have sought refuge elsewhere.
However, this direct correlation no longer holds, especially as far as the dollar's performance against the euro is concerned.
Over the last few weeks, the dollar has actually been able to push ahead against the euro at times, even though equities have continued to rise.
Fears that the dollar might also suffer from some mass exodus by foreign central banks into alternative reserve currencies have also died down. At a meeting in Russia this week, the so-called BRIC nations - Brazil, Russia, India and China - which hold a sizable amount of global reserves between them, failed to make the call for a switch as had been threatened by Russia.
Stuart Bennett, senior foreign exchange strategist with Calyon Credit Agricole in London, likened the whole episode to the tale of the boy who cried wolf.
"Any continuation in the Russian jaw-boning may have much less impact on the dollar as the foreign exchange markets start to increasingly question their seriousness," Bennett said.
Also on the side of the dollar-positive equation is the decline in the U.S. current gap, to $101.5 billion in the first quarter from $154.9 billion in the fourth, as reported Wednesday. This may not have shrunk as much as some analysts expected but will still reduce the country's external financing need and lower concerns about foreign appetite for U.S. assets, at least for now.
Investor fears that U.S. inflation is set to bounce back because of quantitative easing should also be allayed by recent weak producer price figures. Economists reckon that with industrial spare capacity at record lows and wage rates set to tumble, there is little room for inflation to rebound just now.
"There is little inflation threat in the U.S. economy for the next couple of years," said James Knightley, senior economist with ING Financial Markets in London.
On the euro-negative side, meantime, it could well be the warning from the ECB earlier this week that European banks will lose another $283 billion before the end of 2010 that triggers the next leg in the euro's demise.
Some bears reckon this will be triggered much sooner than the autumn.
"Commitment to this trade will build if the 1.3721 break level goes," said Alan Ruskin, a strategist with Commerzbank in London.
Early Thursday in Europe, the euro was up a little at $1.3975 by 0710 GMT, from $1.3945 late Wednesday in New York, according to EBS.
The single currency got a little lift from optimism over the global recovery, especially as crude oil prices continue to edge higher. The price of crude futures on the New York Mercantile Exchange rose 27 cents overnight to $71.30 a barrel.
The euro is also up at Y134.23 from Y133.33, while the dollar is up at Y96.02 from Y95.63.
At least two major drags on the dollar - risk correlation and fears of reserve diversification - are fading.
At the same time, concerns over the euro are rising, with euro-zone banks becoming increasingly vulnerable to failure, as suggested by the recent loss estimates produced by the European Central Bank.
"Autumn might be crunch time as by then we will see the current economic rebound running out of steam, spreads widening again, asset volatility increasing and equities declining," said Hans Redeker, head of global foreign exchange strategy at BNP Paribas in London.
Although Redeker doesn't see an immediate sell-off in the euro, he certainly sees one coming.
"For now, the euro might enjoy its last hurrah, but in the autumn this currency will be in retreat and we suggest it might be a big one," he said.
Chances are the retreat against the dollar could come even sooner.
First, the dollar's outlook is improving.
Over the last month or two, the dollar has generally suffered at times when optimism over the global recovery has risen, equities have rallied and risk appetite has increased.
Shunning the dollar's essentially safe haven status, investors have sought refuge elsewhere.
However, this direct correlation no longer holds, especially as far as the dollar's performance against the euro is concerned.
Over the last few weeks, the dollar has actually been able to push ahead against the euro at times, even though equities have continued to rise.
Fears that the dollar might also suffer from some mass exodus by foreign central banks into alternative reserve currencies have also died down. At a meeting in Russia this week, the so-called BRIC nations - Brazil, Russia, India and China - which hold a sizable amount of global reserves between them, failed to make the call for a switch as had been threatened by Russia.
Stuart Bennett, senior foreign exchange strategist with Calyon Credit Agricole in London, likened the whole episode to the tale of the boy who cried wolf.
"Any continuation in the Russian jaw-boning may have much less impact on the dollar as the foreign exchange markets start to increasingly question their seriousness," Bennett said.
Also on the side of the dollar-positive equation is the decline in the U.S. current gap, to $101.5 billion in the first quarter from $154.9 billion in the fourth, as reported Wednesday. This may not have shrunk as much as some analysts expected but will still reduce the country's external financing need and lower concerns about foreign appetite for U.S. assets, at least for now.
Investor fears that U.S. inflation is set to bounce back because of quantitative easing should also be allayed by recent weak producer price figures. Economists reckon that with industrial spare capacity at record lows and wage rates set to tumble, there is little room for inflation to rebound just now.
"There is little inflation threat in the U.S. economy for the next couple of years," said James Knightley, senior economist with ING Financial Markets in London.
On the euro-negative side, meantime, it could well be the warning from the ECB earlier this week that European banks will lose another $283 billion before the end of 2010 that triggers the next leg in the euro's demise.
Some bears reckon this will be triggered much sooner than the autumn.
"Commitment to this trade will build if the 1.3721 break level goes," said Alan Ruskin, a strategist with Commerzbank in London.
Early Thursday in Europe, the euro was up a little at $1.3975 by 0710 GMT, from $1.3945 late Wednesday in New York, according to EBS.
The single currency got a little lift from optimism over the global recovery, especially as crude oil prices continue to edge higher. The price of crude futures on the New York Mercantile Exchange rose 27 cents overnight to $71.30 a barrel.
The euro is also up at Y134.23 from Y133.33, while the dollar is up at Y96.02 from Y95.63.
- 18 June |
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