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Sunday 7 February 2010
Euro losing allure as substitute to greenback
Investors are pulling cash out of Europe at a record pace as central banks slow euro purchases, jeopardising its status as a substitute to the US dollar as the world’s reserve currency.
Investors are pulling cash out of Europe at a record pace as central banks slow euro purchases, jeopardising its status as a substitute to the US dollar as the world’s reserve currency.
Last year, policymakers loaded up on euros, while analysts at Barclays and Aletti Gestielle predicted central banks would make good on threats to reduce the greenback’s dominance. Now the euro is at its weakest since last May amid concern cash-strapped countries like Greece will not pay their debts.
And euro’s pain has been dollar’s gain, with the US currency hitting a seven-month high against a currency basket. Billionaire investor George Soros last month said there was “no attractive alternative” to the dollar.
Investors are as bearish on the euro as they were when the 2008 financial crisis was pushing them to the dollar, futures data show.
“The euro can fall further,” Neil Mackinnon, an economist at VTB Capital, said. “Sovereign-debt risk will continue to be a key theme. The stresses created by the fiscal situation in Greece won’t go away quickly.”
Without specifying a timeframe, Mackinnon predicted the euro would weaken to US$1.20. If it finishes 2010 at that level, the year’s 16.2 per cent loss would be the worst since the currency’s 1999 inception.
“Greece is the catalyst, but it goes to the root of the entire structure of the euro,” said Adnan Akant, head of foreign exchange in New York at Fischer Francis Trees & Watts. “The US and Asia are likely to outpace Europe in recovery. That is reason enough” to bet against the euro, he said.
At last month’s annual World Economic Forum in Davos, New York University professor Nouriel Roubini said Europe’s fiscal woes were creating “a rising risk” that its single-currency alliance would splinter. “Down the line, not this year or two years from now, we could have a break-up of the monetary union,” Roubini said.
Speaking at the same event, Soros said the euro’s “problems” made it an unviable substitute reserve currency.
The euro has fallen against all the 16 most-traded currencies except Brazil’s real and Denmark’s krone this year.
In the third quarter of last year, central banks put 15 per cent of new reserves, or US$17.8 billion, into euros, the smallest share for any quarter in which policymakers’ reserves grew since early 2008. Central banks put 45 per cent, or US$52 billion, into dollars during the period, up from 36 per cent.
Investors are following central bankers’ lead. Those outside the euro zone sold a net €3.9 billion (HK$ 41.85 billion) of the region’s equities, bonds and money-market securities in November, the first monthly outflow since July, ECB data show.
“Central banks are looking at ways of buying something other than euros,” Akant said. “The euro has been overvalued. Its best days were always as an anti-dollar trade, and now it’s losing that status.”
But Werner Eppacher, head of foreign exchange at DWS Investment in Frankfurt, said investors outside Europe were “overreacting” to the euro’s drop. “The euro is cheap at current levels ... Sooner or later the negative news will be priced in, and then you have the best opportunities to buy the euro.”
This is the price to be paid in any errors in policies.
Now, if Greece can’t persuade investors to buy 53 billion euros of its government debt this year, it may have to seek a bailout from its European Union brethren or the International Monetary Fund — or, worse, to default.
The stakes are high not just for Greece but for the entire euro zone, where efforts to forge a common economic identity are threatened by the financial crisis.
“Investor sentiment is now focused on countries like Spain and Portugal, where fundamentals are weakest.” He said that for now, he saw little risk for Italy, given the relative stability of its economy.
Question the grand European experiment of squeezing 16 disparate countries into a monetary union. “Without a political union, in the long run the euro zone cannot last.”
Again.... the loop hole of a common pool in the monetory world. JMHO.
To avoid such a possibility — and to calm the panic in the markets — the European Commission may decide to rescue one or more of the governments. But a bailout of Greece, Spain or Portugal would not be as easy as the United Arab Emirates writing a check to Dubai: The European charter includes a no-bailout clause. Even if such a clause were to be overridden, much of the financial burden — and it would be huge — would fall upon Germany, the richest member of the union, said Daniel Gros, who leads the Center for European Policy Studies in Brussels.
3 comments:
Euro losing allure as substitute to greenback
Bloomberg, Reuters
07 February 2010
Investors are pulling cash out of Europe at a record pace as central banks slow euro purchases, jeopardising its status as a substitute to the US dollar as the world’s reserve currency.
Last year, policymakers loaded up on euros, while analysts at Barclays and Aletti Gestielle predicted central banks would make good on threats to reduce the greenback’s dominance. Now the euro is at its weakest since last May amid concern cash-strapped countries like Greece will not pay their debts.
And euro’s pain has been dollar’s gain, with the US currency hitting a seven-month high against a currency basket. Billionaire investor George Soros last month said there was “no attractive alternative” to the dollar.
Investors are as bearish on the euro as they were when the 2008 financial crisis was pushing them to the dollar, futures data show.
“The euro can fall further,” Neil Mackinnon, an economist at VTB Capital, said. “Sovereign-debt risk will continue to be a key theme. The stresses created by the fiscal situation in Greece won’t go away quickly.”
Without specifying a timeframe, Mackinnon predicted the euro would weaken to US$1.20. If it finishes 2010 at that level, the year’s 16.2 per cent loss would be the worst since the currency’s 1999 inception.
“Greece is the catalyst, but it goes to the root of the entire structure of the euro,” said Adnan Akant, head of foreign exchange in New York at Fischer Francis Trees & Watts. “The US and Asia are likely to outpace Europe in recovery. That is reason enough” to bet against the euro, he said.
At last month’s annual World Economic Forum in Davos, New York University professor Nouriel Roubini said Europe’s fiscal woes were creating “a rising risk” that its single-currency alliance would splinter. “Down the line, not this year or two years from now, we could have a break-up of the monetary union,” Roubini said.
Speaking at the same event, Soros said the euro’s “problems” made it an unviable substitute reserve currency.
The euro has fallen against all the 16 most-traded currencies except Brazil’s real and Denmark’s krone this year.
In the third quarter of last year, central banks put 15 per cent of new reserves, or US$17.8 billion, into euros, the smallest share for any quarter in which policymakers’ reserves grew since early 2008. Central banks put 45 per cent, or US$52 billion, into dollars during the period, up from 36 per cent.
Investors are following central bankers’ lead. Those outside the euro zone sold a net €3.9 billion (HK$ 41.85 billion) of the region’s equities, bonds and money-market securities in November, the first monthly outflow since July, ECB data show.
“Central banks are looking at ways of buying something other than euros,” Akant said. “The euro has been overvalued. Its best days were always as an anti-dollar trade, and now it’s losing that status.”
But Werner Eppacher, head of foreign exchange at DWS Investment in Frankfurt, said investors outside Europe were “overreacting” to the euro’s drop. “The euro is cheap at current levels ... Sooner or later the negative news will be priced in, and then you have the best opportunities to buy the euro.”
This is the price to be paid in any errors in policies.
Now, if Greece can’t persuade investors to buy 53 billion euros of its government debt this year, it may have to seek a bailout from its European Union brethren or the International Monetary Fund — or, worse, to default.
The stakes are high not just for Greece but for the entire euro zone, where efforts to forge a common economic identity are threatened by the financial crisis.
“Investor sentiment is now focused on countries like Spain and Portugal, where fundamentals are weakest.” He said that for now, he saw little risk for Italy, given the relative stability of its economy.
Question the grand European experiment of squeezing 16 disparate countries into a monetary union. “Without a political union, in the long run the euro zone cannot last.”
Again.... the loop hole of a common pool in the monetory world. JMHO.
To avoid such a possibility — and to calm the panic in the markets — the European Commission may decide to rescue one or more of the governments. But a bailout of Greece, Spain or Portugal would not be as easy as the United Arab Emirates writing a check to Dubai: The European charter includes a no-bailout clause. Even if such a clause were to be overridden, much of the financial burden — and it would be huge — would fall upon Germany, the richest member of the union, said Daniel Gros, who leads the Center for European Policy Studies in Brussels.
That is why it would be easier to call in the I.M.F
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