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Euro Remains Above Average Amid Debt Concerns
By Catarina Saraiva and Garth Theunissen - Sep 26, 2011 11:36 AM GMT
For all the concern about sovereign default in Europe, the euro remains
above its average since being created almost 12 years ago, a sign that
foreign-exchange traders see little chance of a collapse as officials step
up efforts to keep the debt crisis from expanding.
'Too much political and ideological capital has been invested into making
the euro project work and bringing the continent of Europe closer together
since the end of World War II to allow it to unravel now, ' Thanos
Papasavvas, the head of currency management in London at Investec Asset
Management Ltd., which invests about $95 billion, said in a Sept. 20
interview.
Investors from billionaire George Soros, whose $10 billion bet in 1992
preceded the Bank of England's devaluation of the pound, to John Taylor,
who runs the world's biggest currency hedge fund, have predicted the
euro's breakup or forecast it will slump to parity with the dollar.
At the same time, the currency's relative strength reflects the commitment
of German Chancellor Angela Merkel and French President Nicolas Sarkozy to
solve the region's debt crisis and keep Greece, Ireland and Portugal in
the 17-nation bloc. While bonds show growing expectations of a Greek
default, currency strategists still predict the euro will appreciate this
year.
Rescue-Fund Talks
European governments are exploring accelerating the start of a permanent
rescue fund for their economies, with senior finance officials set to
examine this week the cost advantages of setting up the European Stability
Mechanism, or ESM, a year earlier than its July 2013 start, according to a
document prepared for the meetings and obtained by Bloomberg News.
'The euro is still the best way for the peripheral countries in Europe to
become more competitive and address their structural issues, ' Papasavvas
said.
The euro strengthened 1.42 percent last week against a basket of nine
developed-nation peers, the most since gaining 1.55 percent in the period
ended June 3, according to Bloomberg Correlation-Weighted Currency
Indexes. It has risen 2.4 percent from this month's low on Sept. 12, the
indexes show.
At last week's close of $1.35, the currency is 12 percent stronger than
its average of $1.2024 since January 1999. While strategists have cut
their forecasts for appreciation, they still see it rising to $1.43 by the
end of 2012, based on the median of 35 estimates in a Bloomberg survey.
The shared currency extended losses today, falling to as low as 101.94
yen, the weakest since June 2001, and losing 0.4 percent to $1.3449 as of
6:23 a.m. in New York.
'Cathartic' Default
Schneider Foreign Exchange, the most-accurate currency forecaster during
the six quarters through June 30 according to data compiled by Bloomberg,
predicts the euro will trade at $1.56 next year. A default by Greece will
prove 'cathartic' for the region, shifting attention back to the U.S.'s $1
trillion budget deficit and rising debt, according to Stephen Gallo, the
firm's head of market analysis in London.
Nomura Holdings Inc. cut its year-end prediction this month to $1.30 from
$1.40 amid increasing stress in Europe's fixed- income markets and as
investors wait for EU officials to present details on how they plan to
keep the union together.
'The big euro-zone bond markets are under pressure and we don't really
have any policy response lined up whatsoever, in fact we're in a policy
vacuum, ' Jens Nordvig, global head of Group of 10 foreign exchange
strategy in New York at Nomura, said in a Sept. 22 telephone interview.
Default Swaps
The Markit iTraxx Financial Index of credit-default swaps on the senior
debt of European 25 banks and insurers jumped as much as 23 basis points
on Sept. 23 to an all-time high of 325 basis points, according to JPMorgan
Chase & Co. The Markit iTraxx SovX Western Europe Index of swaps on 15
governments rose 5.5 to 365.5, CMA prices show.
Greek two-year note yields posted their biggest weekly increase in the
period ended Sept. 23 since it joined the euro region, surging 14.76
percentage points to 69.8 percent, as credit-default swaps signaled a 94
percent probability the government will renege on its obligations within
five years. Portugal 10-year yields jumped 63 basis points to 11.8
percent.
Greece and Portugal may be able to regain their economic competitiveness
by leaving the euro, Soros said in a Sept. 16 New York Times editorial.
Taylor, whose FX Concepts LLC oversees $8.5 billion, has said the euro
would fall to parity with its U.S. counterpart as the EU crisis escalates.
Austerity measures in Europe designed to lower debts and deficits means
the EU's economy may grow more slowly.
IMF Cuts Outlook
The International Monetary Fund cut its estimates last week for the
region's expansion this year to 1.6 percent from 2 percent, and in 2012 to
1.1 percent from 1.7 percent. That compares with growth of 4 percent in
2011 and 2012 in the world economy, the organization forecast.
'Damage is done, ' JPMorgan Chase & Co. Chief Economist Bruce Kasman said
Sept. 24 during a panel discussion at the Institute of International
Finance annual meeting in Washington. 'Europe in our mind is entering
recession. Greece is insolvent and the European Union needs to deal with
that. It hasn't yet come to terms with that.'
The ESM will have a 500 billion-euro ($670 billion) war chest that would
help shield countries such as Italy and Spain from the region's growing
debt crisis. It also includes provisions for sharing costs with
bondholders for countries with 'unsustainable' debt.
Credit-default swaps on sovereign debt of Italy, Spain, Belgium, France
and Germany also rose to records on Sept. 23. Contracts on Italy rose 13
to 547, Spain jumped 17 to 450, Belgium climbed 10 basis points to 304,
France increased 3.5 to 206, Germany advanced four to 110, CMA prices
show.
'Effective Financing Structure'
Faster ESM enactment would provide a 'more effective financing structure'
that cuts the extra debt of donor countries by 38.5 billion euros,
according to the document obtained by Bloomberg News. 'This gain is to be
considered as a minimum, ' it said.
Asked by Bloomberg Television about bringing forward the ESM's start date,
EU Economic and Monetary Affairs Commissioner Olli Rehn said the focus for
now is on upgrading the temporary fund, the 440 billion-euro European
Financial Stability Facility.
Speculating on a weaker euro means betting against the ability of Merkel
and Sarkozy to keep the EU together. The two said this month in a joint
statement that 'it is more than ever indispensable' to 'assure the
stability of the euro zone.'
IMF Managing Director Christine Lagarde said investors haven't taken into
account 'very solid fiscal consolidation' in some euro region nations.
'Under the Skin'
'I would hope that analysts would actually look under the skin of budgets
of economies, of policies, to appreciate their solidity, ' Lagarde said in
a Sept. 22 Bloomberg Television interview with Tom Keene.
Germany, Europe's largest economy, benefits from keeping the EU together
because 43 percent of its goods, or about 416 billion euros, are sold
within the region. Exports were 4.9 percent higher last quarter than three
years ago.
'It would complicate trade a lot if the euro zone breaks up, never mind
the socio-economic impact, ' Ulrich Leuchtmann, Commerzbank AG's head of
currency strategy, said in a Sept. 22 telephone interview from Frankfurt.
'The euro is the main tool for stronger European integration.'
The euro is the second-most traded currency after the dollar, according to
the Bank for International Settlements in Basel, Switzerland. It accounted
for 26.6 percent of global currency reserves as of March 31, up from 18
percent at its inception, and second only to the greenback's 60.7 percent.
Euro Support
Concern the U.S.'s debt and deficits may become unmanageable as economic
growth slows is helping support the euro. The Federal Reserve said last
week it would sell $400 billion of short-term debt and reinvest the
proceeds in longer- maturity Treasuries to contain borrowing costs because
of what it sees as 'significant downside risks to the economic outlook.'
'There's still enough concern about the Fed and the U.S. economy that it
limits the degree to which the euro falls, ' Steven Englander, head of
Group of 10 currency strategy at Citigroup Inc. in New York, said in a
Sept. 21 telephone interview.
Over the life of the euro, the Bloomberg Correlation- Weighted Index that
measures its performance has ranged from as low as 89.3740 in October 2000
to as high as 120.3054 in December 2008, before ending last week at
99.4761.
Euro Challenges
Against the dollar, it has ranged from 82.3 cents in October 2000 to
$1.6038 in July 2008. The euro will hold above $1.30 this year as central
banks led by the Swiss National Bank and sovereign-wealth funds such as
those in Asia seek alternatives to the dollar, Michael Derks, the chief
strategist at foreign-exchange broker FxPro Group Ltd. in London, said
last week.
'I don't think the euro is going to break up, it's facing lots of
challenges but it's not going to fall apart, ' Audrey Childe-Freeman,
global head of currency strategy in London at the private-banking unit of
JPMorgan, said Sept. 22 by telephone. 'Economically, no member country
would gain from a breakup of the euro-zone and that's why politically,
it's unlikely to happen.'
To contact the reporters on this story: Catarina Saraiva in New York at
asaraiva5@bloomberg.net; Garth Theunissen in London gtheunissen@bloomberg.net.
To contact the editors responsible for this story: Daniel Tilles at
dtilles@bloomberg.net; Dave Liedtka at dliedtka@bloomberg.net
Article Courtesy:
http://www.bloomberg.com/news/2011-09-25/euro-trading-above-average-since-1999-debut-undermines-calls-for-collapse.html
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