- EUR fundamentals are poor. As the economy slows rapidly, interest rates must fall further for much longer and short end rate spreads move further against it. The exposure of European banks to emerging markets is another concern, bigger than US exposure in Asia and Latin America and much bigger in emerging Europe, where countries like Hungary bring global crisis within EU borders. Also worry about structural EUR weaknesses. One currency with multiple fiscal policies is a crack in the foundations that only matters in times of acute stress – like now. The ‘Most Ugly’ global FX baton has already passed from the dollar to the pound. By this time next year it will reside in the hand of the EUR.
- But there are also serious dollar risks to consider: First, it’s not just US investors who are fleeing foreign investments and bringing the money ‘home’. The stock of foreign investment in the US is larger and is also shrinking, albeit so far at a slightly slower pace. But the fact that selling dollars (and often selling volatility as well) became a global habit over seven long years means global corporations, European pension funds, Chinese commodity buyers and retail investors are left on the ‘wrong’ side of FX hedges and structures, sustaining dollar demand for
longer. Another risk for the dollar is more aggressive US monetary easing. Most important may be the rate on which the Fed pays interest on banks’ reserves held with it. This could become the signal that the US is en route to zero policy rates. Even more threatening would be if worries over dis-inflation or even deflation drove the US to more overtly quantitative forms of monetary easing through even faster expansion of the Fed’s balance sheet. Potentially this is US policy akin to, if not on the same scale as 1990s Japan. If things become that bad then all stronger dollar bets are off.
EUR/USD Fundamentals
November 19th, 2008 · No Comments
Tags: EURO
0 responses so far ↓
There are no comments yet...Kick things off by filling out the form below.
You must log in to post a comment.