Forex Market Commentaries - Long Live the Euro

The Euro is Dead, Long Live the Euro

Sep 26 • Market Commentaries • 3745 Views • Comments Off on The Euro is Dead, Long Live the Euro

A day will come when all nations on our continent will form a European brotherhood. A day will come when we shall see the United States of America and the United States of Europe, face to face, reaching out for each other across the seas. – Victor Hugo 1848.

In December 1996, the designs for the euro banknotes were chosen after a contest. The Council of the European Monetary Institute (EMI) chose the winner, the Austrian artist Robert Kalina, “Ages and Styles of Europe” was the theme. The symbolism was; windows, gateways, and bridges. Luc Luycx, a Belgian artist, won the European wide competition organised to design the euro coins. He designed the European common side. The national side is different in each of the twelve countries. The euro initially became the common currency of Europe for twelve countries in the European Union. This was quite simply the biggest changing of money the modern world had ever witnessed when the currency ‘went live’ in 2002.

The European Union (EU) is as wealthy as the United States. The EU is the world’s biggest trading area. The euro is the second largest reserve currency and the second most traded currency in the world after the United States dollar. As of July 2011, with nearly €890 billion in circulation, the euro had the highest combined value of banknotes and coins in circulation in the world, having surpassed the U.S. dollar. Based on International Monetary Fund estimates of 2008 GDP and purchasing power parity among the various currencies, the eurozone is the second largest economy in the world.

George Soros, whose $10 billion bet in 1992 preceded the Bank of England’s devaluation of the pound and John Taylor at FX Concepts, 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. However, their prediction could easily be translated as a bet, they obviously have reasons why they want a collapse and those reasons are not altruistic, it’s basic greed. Those fully committed to the shrill of wailing opposition versus the currency might have backed the wrong team. Be under no illusion that despite being on it’s own knees whilst naval gazing, the threats to the USA’s reserve currency status have always caused a stir in the USA administration since European economic unification. Particularly when that threat to the dollar’s reserve status extends to oil being priced in euros.

Against the dollar, the euro has ranged from 82.3 cents in October 2000 to $1.6038 in July 2008. General consensus is to that the euro will hold above $1.30 this year as Central Banks and sovereign-wealth funds seek alternatives to the dollar. Let’s not forget that the SNB (Swiss National Bank’s) determination to peg the franc also directly supports the euro as an indirect ‘by proxy’ storage of wealth. That peg is proving to be a huge blow to the previously semi permanently ‘parked’ and hidden wealth.

Despite all the turmoil the euro actually strengthened by 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 2.5 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. A circa 40% fall, in order to reach parity with the USA dollar, is surely off the radar?


Forex Demo Account Forex Live Account Fund Your Account


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. They also go far further by suggesting that a default by Greece would prove to be incredibly “cathartic” for the region, shifting attention straight back to the U.S.’s $1 trillion budget deficit and rising debt, according to Stephen Gallo, the firm’s head of market analysis. That focus could also return to the UK as its deficit and debt management which only by the grace of ‘clever’ public relations and deflection has remained unquestioned. Whilst the UK’s credit card bill (deficit) appears under control the mortgage (overall debt) is still massive.

“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. “Economically, no member country would gain from a breakup of the euro-zone and that’s why politically, it’s unlikely to happen.”

“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, head of currency management in London at Investec Asset Management Ltd., which invests about $95 billion, said in a Sept. 20 interview with Bloomberg.

Whilst all the mainstream media focus has been on the potential collapse of the Euro, particularly by right-wing politicians who are prematurely dancing on it’s grave, should they begin to finally accept that such a huge project cannot and will not be allowed to fail? When considering recent history it’s worth recalling how strong countries such as Argentina emerged from their secular monetary crisis, the worry manifesting throughout the Euro’s enemies could be that the Euro region may emerge stronger and more united once this crisis is finished. A concept that the USA administration could find unpalatable if ultimately affecting the reserve status of their currency.

Comments are closed.

« »