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A fresh, grisly decline in the euro is seen as a near-certainty as pressure on the currency builds.
The euro climbed towards the end of last year, against the dollar at least. But that had nothing to do with a turnaround in sentiment on the common currency, and everything to do with traders unwinding negative bets as they shut up shop for the holidays.
But don’t forget that over that period, the euro remained under record-breaking pressure against the Swiss franc, and other regional favourites, such as the Swedish krona.
Now, traders and investors are properly back in action, and they’re itching for an excuse to hammer the euro lower against the buck yet again.
With good reason, too. Despite all the summits, Chinese support, and fine words in 2010, the powers-that-be failed to come up with any permanent solution to the fiscal and debt-related stresses that have pinched some of the euro’s members. No one truly believes that the euro’s crisis of credibility, and some would say, survival, is over.
(Incidentally, the currency’s newest full member, Estonia, which joined up Jan. 1, is widely seen as a fine example of how to sort out that mess, as its painful austerity measures succeeded in bringing the country’s economy into line.)
Now, in just the second full trading day of 2011, the euro is creeping lower again. It has popped below $1.33 against the dollar, and market-watchers are setting their sights on key technical supports just below $1.30. A full-on rerun of the currency’s flaying in the opening months of 2010 is a distinct possibility. The market is just waiting for the right moment, the right headline, to pounce.
Already, the currency’s decline against shinier regional peers is pretty grim. It slid to a fresh six-year low against the Swedish krona Wednesday, much to the chagrin, no doubt, of Sweden’s already-squealing exporters. And it’s a brave (or daft) observer who rules out a fresh record low against the Swissie.
The trigger for this fresh run of euro nerves is solid enough: the Swiss National Bank is now refusing to accept Irish government bonds as collateral, as this debt falls short of its “stringent requirements with regard to credit rating and liquidity,” the central bank said.
No matter that this actually happened on Dec 21, and that it is basically a formality following Ireland’s ratings downgrades. The news grabbed attention only this week, and it offers a reminder, to anyone who has been living in a cave or listening only to the official line (the euro’s totally fine, you know–that’s what they say, at least) that the euro-zone fiscal crisis is still alive and well.
The snag here is the dollar. As analysts at UBS have pointed out, an all-guns-blazing rerun of the euro crisis could push the common currency down to parity against the dollar this year. But if the U.S. economy enters deflation, the euro could swing up to $1.50.
If the euro does start sinking, then even though that’s unnerving, particularly if it comes amid a fully-fledged existential crisis for the common currency, then do try to remember that a weak currency is exactly what the euro’s weaker members need. It’s a boon to exporters in tough economic times.
Either way, it’s likely wise, as UBS advises, to brace for a “super-volatile” 2011. Happy new year!
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The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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