sábado, 29 de agosto de 2015

sábado, agosto 29, 2015

Markets Storm Leaves Euro High and Dry

The euro’s strength will cause new problems for the eurozone economy and European Central Bank.

By Richard Barley

The European Central Bank’s headquarters in Frankfurt. The European Central Bank’s headquarters in Frankfurt. Photo: Agence France-Presse/Getty Images


As global markets spiral lower, investors are seeking safety. The euro, a currency whose political integrity was in question only six weeks ago, is a clear winner. That presents a headache for the eurozone.

The euro on Monday briefly hit $1.17, its highest against the U.S. dollar since January. Less than a week ago the single currency was close to $1.10. On a trade-weighted basis, the euro is now at its strongest since the European Central Bank announced its bond-purchase scheme in January, data from the central bank show.

In part, the rise in the euro is the result of investors scaling back expectations of an increase in U.S. interest rates. The gap between U.S. and German two-year bond yields has contracted sharply in recent days, undermining the dollar’s appeal. German two-year yields, at -0.28%, are already extraordinarily low.



So, the more the U.S. bond market worries about growth and the ability of the Federal Reserve to increase rates, the more the gap is likely to be squeezed. That will add further support to the euro.

Even more powerful at present are technical forces. The euro’s low-yielding status, with big chunks of the eurozone government bond market offering negative yields, has turned it into a so-called funding currency. In this, it is like the Japanese yen, a currency in which it is attractive to borrow to fund risky bets elsewhere.         

As risk aversion and volatility rises, however, investors may be forced to abandon those wagers and buy back the euros they sold to fund them. One signal that this is happening is the negative correlation between stock markets and the euro: on days where stocks sink, the euro rises, and vice versa.

Monday’s 5.3% drop in the Stoxx Europe 600 was accompanied by a jump of than 1.5% in the euro against the dollar. There is also a feedback loop at work in Europe: a weaker euro was one of the forces propelling stocks higher as investors hoped the currency’s decline would boost European earnings and growth.

Taken together, this is a real challenge for the ECB, which has bet on a weaker euro as a way to boost eurozone inflation. The rise in the euro’s trade-weighted value, in particular, is a sign of a new component to the problem: the depreciation of the Chinese yuan and its ripple effect across emerging-market foreign-exchange rates. As long as the yuan was stable against the dollar, this was a force that could help weaken the euro; this now can’t be relied upon.

Some market participants think the ECB’s September meeting could be a possible venue for some kind of step up in the central bank’s efforts to boost inflation, perhaps by indicating it might reinforce its bond purchases. But given the low level of eurozone yields, even that probably wouldn’t have as much impact on the euro as a reduction in risk aversion—most likely through policy actions in emerging markets, particularly China—or signals the Fed is still pushing to increase rates.

The political survival of the euro was a victory for the ECB. Its newfound attractiveness to global investors will provide much less reason for cheer.

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