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Reply #65: More than one reason for resilient euro (OH REALLY?) [View All]

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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Nov-25-11 09:53 AM
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65. More than one reason for resilient euro (OH REALLY?)

The euro can take a punch, and then some. The currencys ability to withstand increasingly horrifying headlines has been the abiding mystery of the forex market since the middle of last year. Its only intensified in recent weeks as the debt crisis swept in from the periphery, threatened to engulf Italy and Spain, and pushed up yields in AAA-rated France, Finland and the Netherlands. A failed German bund auction on Wednesday, however, threatens to change the game, leaving the debt crisis on the doorstep of the euro zones lone safe haven. But even after a sharp drop Wednesday that added to an ugly November for the euro, the shared currency still stands just below $1.3400 versus the dollar, virtually unchanged on the year.

Given mounting fears the euro project may not even survive in its current form, it seems a wonder the euro isnt trading closer to parity with the dollar or at least testing the lows around $1.19 set in mid-2010 after the crisis pushed Greece into a bailout...A popular theory ties the euros ability to take a licking to repatriation. The story has it that euro-zone banks and other institutions, faced with higher capital requirements and a tougher funding environment, are shedding foreign holdings and repatriating assets. It has a certain logical appeal given recent events. But there are plenty of skeptics who contend repatriation is only part of the equation.

David Bloom, currency strategist at HSBC, argues that the euros buoyancy is due to two factors: a strong external position and a sense that a resolution of the crisis remains in the interest of all concerned. The strong external position refers to the euro zones current account, which is close to balance, and a stream of positive portfolio and mergers-and-acquisition inflows, he noted in a recent research note. The current account is the measure of a countrys or regions entire transactions with the rest of the world. Bloom said that while its difficult to parse the data on portfolio flows, theres no clear sign that inflows reflect only bank capital repatriation. And even if repatriation flows were buoying the euro, its difficult to argue it will end soon, he said.

Even in a worst-case scenario, with one or more members ejected from the shared-currency zone, the revised euro would have an even stronger internal and external position, he said. The turmoil surrounding the exit would likely spur a short-term run to the dollar, but would likely be followed by a strong euro bounce, Bloom noted...
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