Why Euro could continue to fall

[AustinJ]

Why Euro could continue to fall

Without the cushion of sovereign buyers, the euro has been fully exposed to the risks tied to the debt crisis. It neared a two-year low beneath $1.23 in early June 2012.

As Europe's debt crisis worsens, the euro appears to have lost one of its most reliable sources of demand: foreign central banks. That helps explain why the currency, which appeared to be immune to Europe's troubles at the start of 2012, has since plunged to multi-year lows against the dollar and yen. Some fear it could drop further.


Here are key pointers on the trend:

* Central banks have been one of the sturdiest pillars of support for the euro over the past decade, during which world currency reserves swelled to $10 trillion from $2 trillion, according to the International Monetary Fund. In 1999, the euro comprised 18 percent of reserves of which the currency composition was known, IMF data shows. Its share peaked at 28 percent in 2009 then dipped to 25 percent in 2011.

* Most of the currency is in dollars, but reserve managers worried about over-exposure to the greenback routinely recycled part of the money into other currencies, with the euro the top beneficiary. That trend has stalled because reserve accumulation has dried up as the global economic downturn slows trade. With less money coming in, the need to shift into euros has diminished. Concern about the quality of euro-denominated assets given the deepening problems in the euro zone is also playing a role.

* "Official euro demand is gone and unlikely to return any time soon," said Greg Anderson, North America head of FX strategy at Citigroup. "Without what has arguably been the biggest factor driving the euro/dollar upward over the past 10 years, downside pressures are much more likely to prevail."

* Without the cushion of sovereign buyers, the euro has been fully exposed to the risks tied to the debt crisis. It neared a two-year low beneath $1.23 in early June before rebounding slightly after Europe agreed on a Spanish bank rescue. It was still down more than 5 percent since the start of May.

* Even more troubling, fears about Spain's finances and an upcoming Greek election that could end with Athens quitting the euro has spurred private investors, including Europeans, to dump euros in recent weeks in favor of other currencies, said Jens Nordvig, head of fixed income research at Nomura. If the combination of diminished public and private demand persists, the euro could hit $1.10 in coming months, he said.

* The IMF will not release data on first-quarter accumulation until the end of June. But according to Morgan Stanley, which tracks $9.8 trillion of reserves, growth in overall reserves slowed to a 7 percent pace in April from about 20 percent in September of 2011. Some of the countries with the largest stash of reserves - Japan, Korea, Russia, India and Taiwan - all reported declines in May. China, the largest reserve holder with $3.3 trillion, reported a decline in March, the latest data available showed.

* Brad Bechtel, managing director of FX brokerage Faros Trading in Stamford, Connecticut, whose clients include central banks, said reserve managers in Brazil, Korea and elsewhere have been selling dollars to prevent domestic currencies from weakening excessively as global growth slows. That often obliges them to sell euros as well to maintain the right currency balance in their portfolios. "We are definitely in a low accumulation environment," he said. "Central banks right now are all just playing defense."

* Traders say a lack of sovereign buying was a regular feature in currency markets during the euro's one-way selling in May. In the past, official buyers from Asia or the Middle East were often said to be euro buyers when the currency was losing ground against the dollar. "I think those bids have turned into offers, and that's the true and classic definition of when a bull market turns into a bear market," said Lane Newman, director of foreign exchange trading at ING Capital Markets in New York.

* The explosion in reserves since 2002 has been driven mainly by fast-growing developing countries such as China that buy vast amounts of dollars to keep their own currencies from getting so strong that they make exports too expensive and slow growth. Typically, a share of that would get changed into euros; Citigroup's Anderson estimated as much as 25 percent to 50 percent of incoming dollars would be converted to euros.

* Reserves at emerging market central banks swelled from about $800 billion in 2002 to $6.7 trillion in 2011, IMF data shows. "That's an awful lot of dollars to be diversified," said Simon Derrick, head of currency research at BNY Mellon in London. "When we ask why the euro went from about $0.80 in 2002 to $1.60 by 2008, well, that accounts for quite a lot of it."

* China does not disclose how it invests its massive reserves, but there are signs that suggest it's been a steady euro buyer. Ian Stannard, who heads Morgan Stanley's European FX strategy team, said that since 2008, changes in Chinese reserves and the euro/dollar exchange rate have moved in lock step 73 percent of the time, with the euro rising when reserves rise. But as the Chinese economy cools, so does the pressure on its currency to appreciate, reducing the need for the Chinese to intervene to keep it weak. The yuan posted its biggest monthly decline on record in May, and forward markets imply it will be weaker still in 12 months.

* China is also trying to reorient its economy toward domestic consumption and away from exports. That means it will become more comfortable with a stronger yuan and make it unnecessary to keep buying dollars and euros in an effort to weaken its own currency. That's partly why Nomura expects Chinese reserves to peak in 2014 and start falling in 2015, which would likely hit the euro, causing it to fall against the dollar.

* The selling is not just a numbers game. As fear about Europe's future grows, reserve managers may start to worry about the credit quality and value of euro-denominated assets. The Swiss National Bank cut the euro's share of its reserves to 51 percent through March from 57 percent at the end of 2011, while a recent Central Banking Publications survey of 54 central banks showed 29 percent had cut euro holdings in the past year.

* Even China's giant sovereign wealth fund, which has a higher tolerance for risk and tries to maximize returns on about $400 billion of the country's reserves, said last week it was cutting back on European stocks and bonds.Nomura's Nordvig said appetite for the yen may rise as a result, as could demand for Canadian and Australian dollars. The supply of the latter two currencies is limited, so the biggest beneficiary will probably be the U.S. dollar. "The euro would lose out heavily if its reserve status was starting to change dramatically," said Alan Ruskin, head of G10 FX strategy at Deutsche Bank. "That would have very negative implications."

copyright @ Thomson-******* 2012

[L-107]

This "article contains so much conjecture and BS its amazing.

It's full of what the author would like to happen .

The euro perhaps will go down in flames. But not the way some north american politicins or bank representatives want it. Also if the euro goes down the ripples will effect everyone . But then again most north american back's have had god knows how many billions to bail them out. This and the fact that most all ratings agency's are based in USA has helped a great deal.


Look before we go down the this happened because of that posts one should note that there is a huge amount of pressure beeing placed on the euro and the EMU . The pressure is both economical and political from outside parties that have things to gain from its colapse. Which is just about everyone outside the EMU. Yes the UK included.

However most of the blame lies and should be taken by the socialist welfare gouvernments that have been voted into power. Once again socialism strykes and it lays havoc.

[AustinJ]

So what are the chances that Euro will survive this crises and will emerge stronger than before ?

Or is it the case that now all is lost of Euro ?

[happyslapper]

The pressure is both economical and political from outside parties that have things to gain from its colapse. Which is just about everyone outside the EMU. Yes the UK included.

I was about to agree with you until I read that bit. The UK has nothing to gain from the EU collapsing, given that the Eurozone is constituted from our biggest trading partners.

There's alot of euroscepticism in the UK, but few people are thick enough to wish for a Euro collapse - even the right-wing press doesn't peddle such a line.

[tluassa]

Even 1.20 would still be ok, will fuel exports to outside EU countries.

[sec]

So what are the chances that Euro will survive this crises and will emerge stronger than before ?

Low.

Or is it the case that now all is lost of Euro ?

This decade is going to be ****ing painful to eurozone countries. Even AAA countries (like Finland where I live) are in trouble. Our national and private debt has gone through the roof, goverment budget is around 50 billion euros of which 8 billion has to be loaned from outside every year and the economy is not growing at all and is threatening to go in downward spiral.

People don't realize how ****ed we are until the cheap imports and low interest loans are gone.

[Herman the II]

I remember the Euro at 1 dollar....

[AustinJ]

What happens to those countries that have kept money in Euro if Eurozone breaks up and each country goes to its own currency ?