OVER the last fortnight, the euro-dollar pairing has turned into a bit of an ugly dog contest, with both sides competing to see who carries the fewest fleas. However, the euro came out second best in this challenge last week, hit with attacks from all sides.
The tipping point for the pairing came when the euro took a hammering on the back of uncertainty about continued Greek membership of the euro. Though the short term fears of a collapse of the European single currency project may have died down for now, nervousness remains,
On the other side, things are only marginally less precarious. The dollar benefited from a boost in confidence after strong non-farm payroll figures for the month. But on both sides of the pond, the occasional good news that boosts one currency or the other is relative and often short-lived, with the long term issues remaining. The European sovereign debt crisis rumbles on, affecting not just Greece, but other weak economies dogged by debt such as Ireland, Italy, and Spain. The United States are heading towards the end of the second quantitative easing cycle, and the end of this money printing will undoubtedly affect the dollar.
With this uncertainty in the future of the two currencies, we asked four experts for their opinion of the pairing’s outlook.
In common with many other assets, last week was not a good one for the euro. By the end of the week, euro-dollar had dropped back by 600 points – a fall of around 4 per cent, which was further compounded by Friday’s late breaking (and ultimately unfounded) rumour that Greek could be exiting the euro. So you could be forgiven for thinking that all this surely means that selling the euro is the only option.
But this week has seen stability return and, although it would be foolish to dismiss the seriousness of the Greek problem in meeting interest rate payments on its bailout, it is not really fresh news for the markets. The ECB broke ranks earlier this year and raised interest rates, signalling there will probably be another rise before the summer.
There still appears to be plenty more attractive destinations for cash than the US dollar at the moment and, although the euro is unlikely to be the top of anyone’s list, it would not be surprising to see another move back by euro-dollar towards the $1.500 highs. Since the end of the Irish crisis the euro is around 10 per cent higher, even after last week’s slide – so it is difficult to see why Greece’s current issue is going to have that material an effect on the fundamentals at the moment.
The euro story is very different depending on your time horizon. On a short-term basis, the euro-dollar pairing has weathered the latest round of sovereign debt concerns extremely well. It is still in a technical uptrend and a reversal in the dollar has yet to materialise in any meaningful way.
Whether you like the idea of the Eurozone or not, it is clear that over the last six months the euro has been immune to the increased risk of default in the peripheral nations, Greece in particular.
While the Fed remains committed to low interest rates then I believe euro-dollar will remain supported up to $1.5000. This is partly due to the European Central Bank hiking rates on the back of strong German growth, but it is also down to a weak buck fuelling a stronger single currency.
But who knows what the long-term outcome will be in a year or perhaps in five years? Can the divergence between the periphery and the core economies continue indefinitely? If not, then the euro may well be consigned to history. That may not be our central scenario but I wouldn’t rule anything out at this stage.
Over the last couple of weeks, the US dollar has strengthened, helped by a strong employment report, while the euro has weakened, haunted yet again by the sovereign debt crisis.
The euro looks vulnerable from a number of angles. One is the suffering peripheral economies, who the rating agencies continue to circle like birds of prey. However, there is a more interesting angle to the future of the euro and it is the fortunes of the German economy. The German economic powerhouse has kept the euro strong from the core; yet, recent events on the political and economic fronts make the strength of the euro questionable. On the political front, Angela Merkel has suffered in the regional elections for her liberal stance towards helping other EU economies. And, from an economic perspective, although we have seen very impressive trade data in March, trade data is historic and the industrial orders for the month were shocking with a drop of 4 per cent. Added to this, the PMI surveys showed slowing levels of growth, as German companies start to suffer from a stronger euro, higher wage and energy costs. Overall, the euro is in over-valued territory and with an upward economic cycle in the US, we expect euro-dollar to test back down lower to the $1.300 level.
It feels like we have gone full circle, but of course Greece is now the major talking point once again. The single currency remains under pressure on the back of the fears surrounding the state of Greece’s finances and the possibility of yet another restructuring of its debt. The euro is extremely fickle at the moment with any good or bad headline being enough to see us spike one way or the other. Over the past couple of weeks, second quarter earnings news has given us something else to talk about for euro-dollar but with this now coming to an end, market focus is gradually returning to macro data.
Arguably the most important G20 release this week is first quarter Eurozone GDP on Friday, particularly after the ECB flagged growth risks from high oil prices in its 5 May press conference. However, both currencies have their problems, with the US also worrying about the possibility of its own technical default. Technical traders are pointing to a potential bounce off the 55 day moving average. However, the worrying news from Greece and the possibility that any hawkish statement from the ECB could cause more uncertainty and increase the likelihood of Greece’s problems working their way to the likes of Portugal and Ireland leaves me thinking that the current uncertainty could float around for a little while longer yet.