Euro expected to stay painfully strong in run-up to Christmas

AFTER only a few weeks of respite for European policymakers, the euro is once again edging back up to test the critical $1.50 level against the US dollar. So far, at least, momentum has been unable to carry the pair through this psychological resistance level for an extended period of time. <br /><br />Officials in the Eurozone have already been complaining about the strong euro, which they say is hurting the region&rsquo;s manufacturers and hindering an economic recovery. Earlier this week, the president of industry federation Business Europe, Jurgen Thumann, called for measures to stem the single currency&rsquo;s inexorable rise against the dollar, saying that an overvalued euro is not good news for growth and is inconsistent with the commitments of the G20 countries for an orderly resolution of global imbalances. <br /><br />But such calls may be in vain. Despite policymakers&rsquo; best efforts to talk down the euro, many foreign exchange strategists continue to see euro-dollar breaking through the $1.50 mark. &ldquo;It&rsquo;s just a matter of time,&rdquo; says Currencies Direct&rsquo;s Mark O&rsquo;Sullivan, who thinks euro-dollar could reach $1.55 in the coming months. &ldquo;People are looking for easy trades at the end of the year and short dollar long euro is one such trade.&rdquo;<br /><br />For now, at least, China&rsquo;s policy to keep its currency firmly pegged to the US dollar has had poor implications for the single currency. Instead of letting the yuan rise against the greenback, China has used the depreciating dollar to flood the European market with exports. <br /><br />O&rsquo;Sullivan says: &ldquo;The strong euro doesn&rsquo;t really seem to be affecting Eurozone manufacturing at the moment. But while officials keep saying through gritted teeth that it isn&rsquo;t a problem, I think it will become a problem for them.&rdquo;<br /><br />Similar comments have recently come from German MP Frank Schaeffler, who said on Monday: &ldquo;Sure, the euro&rsquo;s comparative strength is an irritation for our exporters, but that&rsquo;s a short-term nuisance&hellip; We want a strong euro. The longer-term well-being of the economy depends on it.&rdquo;<br /><br />That said, Germany&rsquo;s manufacturers have shrugged off the stronger euro so far, with exports rising 3.8 per cent in September on the previous month. <br /><br />Schneider FX&rsquo;s Stephen Gallo says that as far as the very near-term is concerned, he feels that the mature euro-dollar uptrend is also causing the short-dollar trade to become relatively crowded. &ldquo;With investors stressing over the extent and timing of the central bank exit strategies, neither heavy consolidation slightly below the $1.50 level in the pair nor outright gains in the dollar are impossible. Simultaneously, EU officials seem bent on encouraging US dollar weakness to flow through channels other than the euro, though that will be more easily said than done,&rdquo; he adds.<br /><br />In this case, and with euro-dollar repeatedly testing the $1.50 level unsuccessfully, investors who think this trend will continue might consider putting a very short-term speculative short trade on the pair with a stop just above the resistance in case the pair does break out higher. <br /><br />And yesterday&rsquo;s ZEW economic survey provided further support for this trade, suggesting that investors only see a gradual recovery in the Eurozone with growth likely to be slow. This would indicate a protracted period of low interest rates, which may stem the euro&rsquo;s future gains above $1.50. Indeed US dollar buyers came back into the market following the data release, capping the currency&rsquo;s gains yesterday.<br /><br />But with the euro on the verge of breaking through $1.50, currency traders might well be tempted to go with the flow and stay bullish on the single currency.