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Monday, 7 February 2011
Euro recovering its strength, thanks to Chinese debt support
The euro has defied predictions of its demise by rising almost 8 per cent against the dollar since mid-January, in large part owing to Chinese confidence in the debt-ridden euro zone, analysts say.
Euro recovering its strength, thanks to Chinese debt support
Agence France-Presse in London 07 February 2011
The euro has defied predictions of its demise by rising almost 8 per cent against the dollar since mid-January, in large part owing to Chinese confidence in the debt-ridden euro zone, analysts say.
However the single currency’s fragile state was exposed on Thursday as it tumbled on receding expectations of a rate rise anytime soon for the euro zone.
“The price action in euro/dollar has largely been one way since January 10,” Neil Mellor, an economist at financial group BNY Mellon, said. “It was around this time that China began to express its very clear support for euro zone debt. A lot of the market’s concerns about funding have been eased, thanks to China.”
The European Financial Stability Facility (EFSF) - established in June to help heavily-indebted euro-zone members - last month sold five-year bonds worth €5 billion (HK$52.88 billion) to help raise funds for Ireland.
China is reported to have taken part after the world’s second-biggest economy signalled its intention to do so last month. Asian bidders snapped up more than one third of the total, in what EFSF head Klaus Regling said demonstrated market confidence in the 17-nation euro zone after the turmoil of massive bailouts for Greece and Ireland last year. The government of Japan alone bought more than 20 per cent.
The single European currency reached a three-month high of US$1.3862 on Wednesday on increased expectations of a rate rise.
However, such forecasts were shattered on Thursday after the European Central Bank kept interest rates on hold and ECB president Jean-Claude Trichet eased fears over high inflation. In the space of 24 hours, the euro was back to just above US$1.36, and fell further after US jobs data was announced. “Although the recent rally in the euro was mostly fuelled by expectations of rate rises by the ECB, sentiment was also boosted by the markets giving European Union officials the benefit of the doubt that they could come up with a credible long-term solution to the sovereign debt crisis,” Kathleen Brooks, an analyst at traders Forex.com, said. “If EU leaders fail to deliver the goods there could be another leg lower for the single currency,” she said. A higher interest rate would meanwhile boost the euro against other major currencies because euro-denominated investments would generate higher returns.
But on Thursday, remarks by Trichet suggested the ECB was less concerned about inflation than earlier thought, and that any rate rise would come later in the year. “Inflation expectations over the medium to longer term continue to be firmly anchored in line with the governing council’s aim of keeping inflation rates below, but close to, 2 per cent,” Trichet said.
2 comments:
Euro recovering its strength, thanks to Chinese debt support
Agence France-Presse in London
07 February 2011
The euro has defied predictions of its demise by rising almost 8 per cent against the dollar since mid-January, in large part owing to Chinese confidence in the debt-ridden euro zone, analysts say.
However the single currency’s fragile state was exposed on Thursday as it tumbled on receding expectations of a rate rise anytime soon for the euro zone.
“The price action in euro/dollar has largely been one way since January 10,” Neil Mellor, an economist at financial group BNY Mellon, said. “It was around this time that China began to express its very clear support for euro zone debt. A lot of the market’s concerns about funding have been eased, thanks to China.”
The European Financial Stability Facility (EFSF) - established in June to help heavily-indebted euro-zone members - last month sold five-year bonds worth €5 billion (HK$52.88 billion) to help raise funds for Ireland.
China is reported to have taken part after the world’s second-biggest economy signalled its intention to do so last month. Asian bidders snapped up more than one third of the total, in what EFSF head Klaus Regling said demonstrated market confidence in the 17-nation euro zone after the turmoil of massive bailouts for Greece and Ireland last year. The government of Japan alone bought more than 20 per cent.
The single European currency reached a three-month high of US$1.3862 on Wednesday on increased expectations of a rate rise.
However, such forecasts were shattered on Thursday after the European Central Bank kept interest rates on hold and ECB president Jean-Claude Trichet eased fears over high inflation. In the space of 24 hours, the euro was back to just above US$1.36, and fell further after US jobs data was announced. “Although the recent rally in the euro was mostly fuelled by expectations of rate rises by the ECB, sentiment was also boosted by the markets giving European Union officials the benefit of the doubt that they could come up with a credible long-term solution to the sovereign debt crisis,” Kathleen Brooks, an analyst at traders Forex.com, said. “If EU leaders fail to deliver the goods there could be another leg lower for the single currency,” she said. A higher interest rate would meanwhile boost the euro against other major currencies because euro-denominated investments would generate higher returns.
But on Thursday, remarks by Trichet suggested the ECB was less concerned about inflation than earlier thought, and that any rate rise would come later in the year. “Inflation expectations over the medium to longer term continue to be firmly anchored in line with the governing council’s aim of keeping inflation rates below, but close to, 2 per cent,” Trichet said.
The fundamentals are pretty weak for the Euro. If risk picks up get ready for a flood back into USD
Intrinsic Value
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