EURO HAS HIT ITS TOP, FOR NOW AT LEAST
BORIS SCHLOSSBERG
DIRECTOR OF CURRENCY RESEARCH, GFT
LAST week, after dramatic moves and countermoves in the currency market, the euro-US dollar pair finally broke through the critical 1.50 barrier. Business media ran a series of stories about the collapse of the dollar and everyone prepared for further declines. Yet despite all the hand-wringing, the dollar remained relatively firm for the rest of the week and actually gained ground against the pound, the loonie and the yen.
So why was the reaction in the dollar so subdued? Part of the answer lies with the fact that the risk trade across all capital markets is now running into resistance. The Dow Jones index’s climb to 10,000 and S&P hitting 1,100 have proven to be formidable barriers, despite the majority of US companies posting upside earnings surprises. With some good news already factored into the price, risk assets are primed for a pullback if traders decide to book profits before the end of the year.
A fresh bout of risk aversion could be just the ticket to spark an unexpected dollar rally. With market sentiment so grossly skewed against the buck, the anti-dollar trade looks very crowded at the moment and markets will want to shake out the weak euro longs.
TROUBLED CONSUMER
Furthermore, the latest economic data from the euro region has started to disappoint traders. Last week, the IFO survey of business sentiment missed expectations, coming in at 91.9 versus an expected 92, and on Monday the GfK German consumer confidence survey declined for the first time in 14 months – recording a reading of 4.0 versus the projected 4.5.
Despite the increase in purchasing power from higher exchange-rate valuations, the German consumer clearly remains troubled about the labour market, and if euro-US dollar continues to rise, those fears could come true as layoffs become a reality. It’s little wonder then that European officials are becoming alarmed at the prospect of further gains in the pair, and will become a lot more vociferous should it climb much past the 1.50 figure.
Therefore, given the chance of the European authorities complaining about the strength of the dollar, and the very real signs of exhaustion in the recovery trade, euro-dollar at 1.50 could prove to be a near-term top for the time being.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read their commentary at www.GFTUK.com/commentary or e-mail them at [email protected].