the bullish argument for the euro

DIRECTOR OF CURRENCY RESEARCH, GFT

AS WE approach 2011, no currency is less liked than the euro. Only yesterday, the euro was at all-time lows against the Swiss franc with the pair sliding towards the SFr1.2500 level. It appears as though all of Europe is trying to exchange the single currency in favour of the Swiss franc, creating a massive one-way move in the pair.

In fact, sentiment has become so extreme in the market that you would be hard pressed to find even a few currency strategists who are bullish on the euro. No doubt the fear in the market is legitimate. The problem of sovereign debt financing in the periphery economies continues to haunt the single currency as we enter the new year, with Spain remaining the primary worry. If it becomes the next Greece or Ireland the possibility of a Eurozone fracture could quickly become an ugly reality. As the region’s fourth largest economy, Spain is simply too large for the EU to rescue by itself.

However
, there may be a white knight on the horizon. Yesterday, Chinese vice-premier Wang Qishan said his nation had taken “concrete action” to help the EU with its debt problems. With more than $2.5 trillion (£1.6 trillion) of foreign reserves, China is the one actor on the global economic stage that could stop the euro’s slide dead in its tracks.

Why would China want to help the EU? Simple. It has both economic and political reasons to do so. The EU is China’s largest trade partner and China is the region’s second-biggest export market, with bilateral trade increasing more than 33 per cent in the past 11 months to November from a year earlier.

Yet political considerations may be even more important than the economic concerns. As a rising global power, China is loath to see a return to a unipolar world with the dollar again the only medium of exchange for trade. Therefore the Chinese are likely to do everything in their power to preserve the euro as a viable alternative to the buck. This is why assuming that the end of the euro is near may be a mistake.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail borisandkathy@gftuk.com