Is the single European currency condemned to rise further?
By Agence France Presse (AFP)
Monday, September 27, 2010
Agence France Presse
NEW YORK: With the US perhaps ready to print more dollars to underpin growth and Japan selling yen to protect its exports, is the euro condemned to pay the price via an unwanted rise?
The single European currency has jumped back above $1.34 in spite of problems facing the eurozone in the form of swollen public deficits and debt.
The euro’s appreciation accelerated after the US Federal Reserve hinted Tuesday it was ready to once again pump cash into the faltering US economy.
In Japan, authorities declined to comment Friday on speculation they had again intervened in currency markets to weaken the yen after it fell sharply against the dollar in volatile Tokyo trade. The yen at one point fell to 85.38 to the dollar before later rebounding to 84.33.
“The logical consequence of this battle between the US and Japan [and China] is that the euro should be forced higher, as happened in 2002,” said Simon Derrick at the BNY Mellon. “It becomes, in effect, the safety valve within the system.”
But at the same time, the creation of the European Financial Stability Facility is a clear sign Europe “has still not fully resolved the longer-structural problem of potential default,” noted Lee Hardman at The Bank of Tokyo-Mitsubishi in London.
For the moment, markets have pushed the euro higher, with investors in Japan expressing negative sentiment against the dollar by buying euros, as they did in 2005-07, Deutsche Bank analyst Alan Ruskin said. “The big difference is long-term sentiment toward the euro is still very negative,” he said.
For Hardman, “the euro is, metaphorically speaking, facing ‘death by a thousand cuts,’” and its “recent renaissance is running on borrowed time.”
He said market sentiment has been eroded by actions like the European Central Bank’s (ECB) purchase of eurozone public debt and weakening of collateral standards in connection with unlimited cash support for eurozone commercial banks.
But the ECB is not likely to intervene like the Bank of Japan because its mandate is to provide price stability, and currency purchases could rekindle troubling speculation about its independence. In addition, “it is not sure … that the ECB could find consensus among its member countries” for an intervention, Deutsche Bank economist Gilles Moec told AFP.
Some countries, including Germany, have managed to prosper even when the euro’s value against other major currencies rises, and a stronger euro has kept the eurozone’s energy bill from going through the roof.
“The ECB … are more comfortable with a stronger currency,” noted David Solin of Foreign Exchange Analytics.
Natixis economist Patrick Artus said his bank felt history showed “the use of currency interventions [the accumulation of foreign exchange reserves] to prevent an exchange rate appreciation is largely ineffective.”
Japanese Premier Naoto Kan nonetheless told the Financial Times that “if there is a drastic change [in the currency], such intervention is unavoidable.”
By Agence France Presse (AFP)
Monday, September 27, 2010
Agence France Presse
NEW YORK: With the US perhaps ready to print more dollars to underpin growth and Japan selling yen to protect its exports, is the euro condemned to pay the price via an unwanted rise?
The single European currency has jumped back above $1.34 in spite of problems facing the eurozone in the form of swollen public deficits and debt.
The euro’s appreciation accelerated after the US Federal Reserve hinted Tuesday it was ready to once again pump cash into the faltering US economy.
In Japan, authorities declined to comment Friday on speculation they had again intervened in currency markets to weaken the yen after it fell sharply against the dollar in volatile Tokyo trade. The yen at one point fell to 85.38 to the dollar before later rebounding to 84.33.
“The logical consequence of this battle between the US and Japan [and China] is that the euro should be forced higher, as happened in 2002,” said Simon Derrick at the BNY Mellon. “It becomes, in effect, the safety valve within the system.”
But at the same time, the creation of the European Financial Stability Facility is a clear sign Europe “has still not fully resolved the longer-structural problem of potential default,” noted Lee Hardman at The Bank of Tokyo-Mitsubishi in London.
For the moment, markets have pushed the euro higher, with investors in Japan expressing negative sentiment against the dollar by buying euros, as they did in 2005-07, Deutsche Bank analyst Alan Ruskin said. “The big difference is long-term sentiment toward the euro is still very negative,” he said.
For Hardman, “the euro is, metaphorically speaking, facing ‘death by a thousand cuts,’” and its “recent renaissance is running on borrowed time.”
He said market sentiment has been eroded by actions like the European Central Bank’s (ECB) purchase of eurozone public debt and weakening of collateral standards in connection with unlimited cash support for eurozone commercial banks.
But the ECB is not likely to intervene like the Bank of Japan because its mandate is to provide price stability, and currency purchases could rekindle troubling speculation about its independence. In addition, “it is not sure … that the ECB could find consensus among its member countries” for an intervention, Deutsche Bank economist Gilles Moec told AFP.
Some countries, including Germany, have managed to prosper even when the euro’s value against other major currencies rises, and a stronger euro has kept the eurozone’s energy bill from going through the roof.
“The ECB … are more comfortable with a stronger currency,” noted David Solin of Foreign Exchange Analytics.
Natixis economist Patrick Artus said his bank felt history showed “the use of currency interventions [the accumulation of foreign exchange reserves] to prevent an exchange rate appreciation is largely ineffective.”
Japanese Premier Naoto Kan nonetheless told the Financial Times that “if there is a drastic change [in the currency], such intervention is unavoidable.”