Sunday, January 26, 2003

Euro at 1.10 Dollars 'Now in Sight'

Or at least this was the sentiment expressed by one anonymous City trader in the FT yesterday. Now, as with all expressed trader opinion, this needs to be taken with a pinch of salt, but it does seem that this figure could become something of a psychological target in days to come. Certainly the Euro is going up and up - over 15% in six months now. Clearly if it does go through the $1.10 barrier this will give the ECB and European Commission something to ponder over, since a high Euro will be good for some and bad for others - another example of how difficult it is to manage monetary policy in a currency union. This is surely a falling dollar story more than it is a rising Euro one. The economic grounds for optimism on the European front are thin on the ground. So one day this will turn, but that day doesn't seem to near right now. However with Germany teetering on the brink of creeping deflation, and the ECB desperately looking for good reasons for another rate cut at a time when core inflation is still stubbornly hovering over the 2% mark, stemming the rise of the Euro could be just the excuse they need.

The euro continued to edge higher against the dollar on Wednesday amid mounting tensions between the US and Iraq.The recent bout of more aggressive rhetoric from the US administration has kept the dollar under pressure in recent days. On Wednesday, the dollar hit a fresh three-year low against the euro at $1.0744.Traders said that $1.10 now appeared in sight.

Risk reversals - an indication of the bias of the options market - provided an interesting hint into the psychology of the marketon Wednesday. Although euro calls continue to trade at a premium to euro puts - suggesting the market still expects a rising euro - this premium is at its lowest level so far this year.Marc Chandler, chief currency strategist at HSBC in New York, said this could be explained by traders long of euros trying to hedge against a fall in the currency. "This hints that many of those who hold a long euro postion do want some protection, but are not willing to sell their spot position," he said. "This is an encouraging sign for the euro," he added.
Source: Financial Times

Incidentally, reading again the US administration hawkish rhetoric argument, it couldn't be that they are using the pre-war atmosphere to move away from the strong dollar policy, now could it. While all eyes are focused on the Bagdad/Washington axis, the dollar is quietly allowed to drop, much to the relief of a deflation worried Greenspan, and a hard pressed US manufacturing sector. Spelling this out: talking hard on Iraq is in fact talking down the dollar without saying so. Or am I being too cynical?

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