Euro Stronger Than Mark Proves Trichet Currency Stays (Update3)
By Bo Nielsen and Oliver Biggadike
June 7 (Bloomberg) -- The euro’s 21 percent tumble from last year’s high has left the currency above the average level since its creation in 1999 and stronger than its predecessor, the deutsche mark.
Even as the euro weakened 2.5 percent last week against the dollar and fell below $1.20 for the first time since March 2006, it remains higher than the close of $1.1837 on Jan. 4, 1999, the first Monday of trading after its introduction, and stronger than the $1.1842 monthly average since inception. A Bloomberg composite of the currencies comprising the euro averaged $1.1945 through last week from the end of 1988, when Europe’s foreign- exchange market was dominated by the German mark.
While former Federal Reserve Chairman Paul Volcker said last month that Europe’s widening debt crisis may cause the 16- nation currency to dissolve, European Central Bank President Jean-Claude Trichet said May 31 the euro is keeping its value in a “remarkable fashion.” Policy makers may welcome the drop to boost exports, Goldman Sachs Group Inc. and Morgan Stanley said.
“Many would say this weaker euro is just what the doctor ordered,” said Alan Ruskin, head of foreign-exchange strategy at Royal Bank of Scotland Group Plc in Stamford, Connecticut. “From a levels standpoint they should have absolutely no complaints and they can live with a euro this low.”
A Deutsche Bank measure weighted according to the region’s biggest trading partners shows the euro is 0.2 percent higher than its average since 2001.
That hasn’t prevented speculation that the EU’s currency is in danger of collapse as the bloc’s leaders unveiled an almost $1 trillion loan package last month to halt the slide in the euro and local bonds after Greece’s budget deficit rose to almost 14 percent of gross domestic product, exceeding the group’s 3 percent limit.
The currency received more shocks when Fitch Ratings cut Spain’s AAA credit grade and officials in Hungary, while not part of the euro, said the nation’s economy is in a “very grave situation,” and talk of a default isn’t “an exaggeration.”
“You have the great problem of a potential disintegration of the euro,” Volcker said in a May 13 speech in London. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” with the creation of the euro has “so far not been rewarded in some countries,” he said.
The weaker euro will boost the EU’s GDP as much as 1 percentage point in 2011, compensating for the brake on growth from lower spending, according to Thomas Stolper, an economist at Goldman Sachs in London. GDP expanded 0.2 percent last quarter from a 2.5 percent contraction a year earlier. The euro and the dollar are the most-traded foreign-exchange pair.
“Bringing about the end of the euro is something that one cannot plausibly conceive of at the moment,” Helmut Schlesinger, head of the Bundesbank from 1991 to 1993, said in a May 25 telephone interview from his home in suburban Frankfurt. “We’ve gotten into difficulties due to the Greeks and possibly Portugal and Spain will have a relatively strong impact, but this is offset by a healthy core in the center of Europe.”
European manufacturers are already starting to reap the benefits of a lower currency. Exports in the 16 euro nations rose 2.5 percent in the first three months of 2010 from the fourth quarter, when they increased 1.7 percent, the EU’s statistics office in Luxembourg said June 4.
German factory orders unexpectedly jumped for a second month in April as the weaker euro boosted export demand and companies increased investment, according to a report today, compared with the drop forecast by a Bloomberg survey of analysts.
The gradual weakening of the euro toward parity with the dollar over the next year may save the shared currency by helping countries such as Greece, Italy and Spain regain competitiveness, said Nouriel Roubini, the New York University economist who predicted the financial crisis.
“An orderly fall in the value of the euro is the only thing that is going to prevent a breakup of the monetary union,” Roubini said June 5 in Trento, Italy.
For STMicroelectronics NV in Geneva, Europe’s largest chipmaker, a 1 percent variation in the exchange rate can add or take away $8 million to $10 million in quarterly gross profit, Chief Financial Officer Carlo Ferro said in an investor presentation on June 3 in London.
“I continue to say that I see good news from the current euro-dollar rate,” French Prime Minister Francois Fillon told reporters in Paris on June 4. “The president and I have been saying for years that the euro-dollar rate didn’t reflect reality and was penalizing our exports.”
The currency, which dropped to $1.1877 today, the weakest level since March 2006, and to 108.08 yen, the weakest since May, 2006, will rise to $1.20 against the dollar and 115 yen by the end of the year before appreciating to $1.22 and 123 yen by the close of 2011, based on median estimates of at least 18 analysts in Bloomberg surveys. Goldman Sachs strategists forecast it will probably “bounce” to $1.35.
“Investors are not crediting sufficiently the possibility that neither growth nor fiscal outcomes will be as poor as expected,” Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, wrote in a June 3 report. “Investors are forgetting that there is no such thing as a one-sided risk over the medium term.”
Barclays, one of the top five forecasters for the euro- dollar exchange rate, predicts the currency will strengthen to $1.25 by the end of the year. New York-based Morgan Stanley pegs the currency’s fair value at between $1.15 and $1.20.
“The euro is not weak,” said Sophia Drossos, co-head of global foreign-exchange strategy at Morgan Stanley. “It’s hard for me to fathom at this juncture why a central bank would be so concerned about needing to support its currency when arguably it’s not even weak from a longer-term fair value perspective.”
Concern that Hungary may renege on its debt drove the euro down 1.61 percent on June 4, the most since March 27, 2009, on speculation the Europe’s debt crisis is worsening.
Credit-default swaps on sovereign bonds in the region climbed to a record high. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments rose to 174.4 basis points. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to meet its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.