This Telegraph article attributes the bearish outlook for the euro to deteriorating fundamentals and expected rate cuts. As the yen attests, a sharp fall in economic activity and prospects can lead traders to change their views, sometimes abruptly. And the euro has always had a whiff of doubt about it, with less than the full suite of institutional arrangements that other major currencies have.a
The story fails to mention a more immediate cause for concern: the possibility of banking failures in Eastern Europe blowing back to the rest of Europe.
From the Telegraph:
In recent days, futures traders in the US have significantly increased their bets that the euro will fall against the dollar. Data released by the Washington-based Commodity Futures Trading Commission on Friday showed that the “net short position” of trades against the euro by hedge funds and speculators almost doubled in the week to March 3 to 19,431 contracts from 10,081 contracts a week earlier.
“Quite a significant correction in the euro is coming in the next few months. The European Central Bank (ECB) is behind the curve in getting to grips with its economic problems,” said David Buik of BGC Partners. He added that the eurozone entered recession later than other economies, but policy-makers had been too slow to act, putting the currency at risk.
The global recession means that the euro is facing its strongest test since its launch a decade ago as the less productive countries such as Spain, Greece and Italy have failed to match the efficiency of some of Europe’s faster growing economies.
Last week the ECB cut interest rates to a record low of 1.5pc and further rate cuts are expected. The ECB now expects that the eurozone economy will contract between 2.2pc – 3.2pc this year, after previously forecasting a fall of zero – 1pc.
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What happened to ‘bye-bye dollar’?
Yves do you still subscribe to the longer term vulnerability of the dollar to the ballooning federal balance sheet?
AT’s Spengler has an interesting take on currency values.
Spengler: “The silliest thing that clever people are saying about the world economic crisis is that the United States will lose its position as the dominant world superpower in consequence. On the contrary: the crisis strengthens the relative position of the United States and exposes the far graver weaknesses of all prospective competitors. It makes the debt of the American government the world’s most desirable asset.”
http://www.atimes.com/atimes/Global_Economy/KB18Dj05.html
Think about it. $50 trillion of wealth has been eliminated from the world due to a crisis that originated in the US, and how’s the dollar doing? Europe is toast. East Asia’s only hope is our markets.
The real problem is that the same people who couldn’t manage the money over the past 10 years are still managing the money.
BTW William Dudley (ex-GS of course), the new governor of the NY Fed, gave an interesting speech Saturday at CFR (h/t Economics of Contempt).
http://economicsofcontempt.blogspot.com/2009/03/talf-20-here-there-be-dragons.html
http://www.newyorkfed.org/newsevents/speeches/2009/dud090306.html
bg,
I think we have a bigger fiat currency problem a-comin’. And I still see the dollar as vulnerable. Look, everyone though the Swissie and more recently the yen were safe places to hide.
The US is so overextended that, as people ranging from Jesse to Willem Buiter have pointed out, the issuance of Federal debt is going to lead to a fall (Buiter even said collapse) in dollar assets. But that could take as long as five years.
Thanks Yves.
I have become more bearish on the dollar as it has become clear how deep the crisis is cutting. My problem as a trader (5 years might as well be when we are all dead) is finding the arguments for capital movement and the amount of currencies printed. It is hard to get bullish on the Euro with their banks and their denial. The RMB should strengthen, but looks whats happening to the Yen. Exports are cratering across asia, and all currencies are falling (except the RMB).
Perhaps when the fed starts buying treasuries en-masse that will tip the balance against the dollar.
I heard a recent quote I found new:
“complexity favors the powerful”. financial crisis are complex, the dollar is powerful. Perhaps when we see the depression abate it will be time to move to other currencies.
bg, if you’re trying to trade anything these days, you’re all in for technicals. Global macro fundamenals can be useful in knowing where the volume is moving, but other than that, it’s a matter of using your favorite osscillators and other techniques. Currencies I would stay away from, these things often turn into life or death intervention struggles by the sponsoring CB which dislocates the market too much to make any reliable indicator trades.
I’m currently trading gold, it’s manipulated as hell, but it’s not utterly, utterly manipulated like FOREX.
YS,
5 years isn’t that long as Orlov has put it. But i think the propagation of the money base through the banking system will take less time.
The EU also has some big printing too. Somehow I haven’t seen any comparative study of this sensitive issue.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3191459/Europe-stuns-with-1.5-trillion-bank-rescue-as-France-plays-role-of-saviour.html
It seems to me every one is playing the game China was playing: debase the currency to gain competitive advantage. Currency manipulators as Geithner has put it. We’re all currency manipulators now.
FTAlphaville were running a story on Friday amount some rumours in Italy, so it will be interesting to see what happens today.
Mama mia – something is afoot in Italy
The Italian bank Unicredit is one of the banks with considerable exposure to eastern Europe and I wonder if this is the start of a speculative attack to see what the ECB is made of.
As for the dollar then the chinese balance between declines of exports and imports will change late on this year forcing the US to print so that it can buy treasuries. I believe some time next year the US economy will receive another tsunami as the dollar declines significantly. In the meantime US exports will continue to tank as other countries export there unemployment to the US by devalueing their curency.
I don’t want to comment on the Telegraph article. I think it’s shallow, the facts are known. What surprises me though is this persistant criticism of the EZB, which has done an excellent job in my opinion. It is time for American and global finance to accept the undeniable fact that this crisis is the direct result of failed Federal Reserve politics. What we have here is years and years of mismanagement by appointed officials at the Fed, who have always favored speculation over savings despite the looming danger of macroeconomic instability. It is time for change and the EZB has to be the model for modern central banking: Favor pragmatism over speculation, the right medicine for macroeconomic stability. Of course this will not cure the disease now but it will help future generations to stay healthy.
what we really should be worried about is when & where the droughts start hittin first:
ukraine?
china?
california?
all of this is just monopoly money til the food starts runnin out.
got spam?
Pure power comes into play during a crisis, where people are looking for a safe haven. U.S. military dominance plays a larger role in dollar supremacy than often acknowledged.
If the dollar is vulnerable (which does make sense), what then, is secure? You have to match that dollar vulnerability up to something else….Otherwise the statement is quite meaningless.
So, what then…
Another currency? All the majors (yen, Swiss, GBP, EURO) have their own “vulnerabilities” when compared to the dollar.
The CAD dollar, then? Maybe…but if USD is weak against the Yen or Euro, for example, then CAD is probably going to be weak as well….so why not go back to Europe or Yen?
Aussie Dollar? Maybe. Certainly makes sense if you favor gold.
How about gold, then? Sure…but this seems like such a one-way, no-brainer kind of trade, that one cannot help but to be a bit skittish.
So what to do with your dollars then???
Well…it just so happens that I have a GREAT deal on a time-share down in Orlando that I’d be happy to sell to you for a pittance of what we paid! Just click on my blog link above….But you’d better be quick! THIS DEAL WILL NOT LAST!!!!!
Nah, but seriously….dollar vulnerability makes a lot of sense until you match the up with “[Fill in the blank] security”.
Whatever is deemed to be secure might just become damn insecure–and quickly—once the mad herd rushes to its aegis.
On Bloomberg, Marc Faber was pressing on the printing press ability to pump share price. And he’s saying that the weakening status of the US$ is a signal of increased liquidity in the system.
Funny that, considering the system is already full of cash, and the Fed is pumping more in to rescue the bondholders unwittingly became the victim of the banksters and us consumers.
Marc Faber forgot about the earning reports of the firm in the NYSE that is a-coming.
Other important Telegraph headline today:
Oprah Winfrey urges Rihanna to leave Chris Brown:
http://www.telegraph.co.uk/news/newstopics/celebritynews/4959591/Oprah-Winfrey-urges-Rihanna-to-leave-Chris-Brown.html
Of course for more in depth coverage one could turn to the National Enquirer
Expert Warns Rihanna:
http://www.nationalenquirer.com/sexcrime_expert_warns_rihanna_chris_borwn_assault_oprah_winfrey_oj_simpson_factor/celebrity/66308
fundamentals do not work, technicals do not work. what shakes currency markets these days is margin calls.
but besides that, it is funny how things seem to decouple over the past couple of weeks and since the equity markets hit another low (13% below november) and oil is further down, the euro has not retested the 1.23s, all the while bets against it increase and despite its relatively positive correlation with stocks and oil. this correlation is weakening by the day. expect a trampoline jump from here on the 1st piece of news of low treasuries bid to cover ratio.
Most of Telegrah´s articles are biased, it is an antieuropean newspaper. All this people went wrong in the last years, they are human and really incompetent proffesionals. No matter that euro keep going down or dollar does, I see gold increasing(yen or swiss francs as noted are no longer havens), too much volatily in currencies. Just a fact USA has spent or granted a 12 trillion bailout compared to 3 trillion in Europe and both have similar GDP. East crisis could cost less thn half a trillion dollar, so those trades could turn out to be backwards. German is interested in keeping euro , 10 years ago German would be watching how all CEE coountries were devaluing theri currencies againsta the DMark.
EVERY fiat currency EVER introduced has failed!!! EVERY SINGLE ONE! Do a little research and take a look back at history.
This talk about whether or not the dollar will collapse is comical.
IT IS GOING TO COLLAPSE! Jeez….open a history book and take a look back in time over the last 5000 years….
The real question is WHEN.
Next week? Next Month? Next decade?
I don’t know…..but there are OBVIOUS storm clouds gathering….no? If you don’t see this storm approaching then you have your head stuck somewhere and you need to pull it out and open your eyes.
Historically, humanity has ALWAYS used gold and silver has a store of value.
You need to own gold and silver has a hedge against the coming dollar collapse.
I am not saying we need to hoard gold and silver, food, water, and guns and head for the hills……but not owning some physical gold and silver in this environment is just plain silly.
When you see the water recede, it matters not whether you can swim or not, don’t go out to the beach to watch or pick luxury itmes like oysters (I wish I could have said that to the foreign tourists in Phuket).
Instead, head for the hills…cause those who know, realize the tsunami is coming.
Simply put, do the counter-intuitive. It will save you in a catastrophe. In the meanwhile, the dollar is strengthening against the Euro…
Dan Duncan, thank you for asking the question that no one answers, other than "glod". No doubt when dollar finally falls, there will be many who say "I told you so", but few actually preict what it will fall against. Another scenario is widespread depreciation, which I intepret to mean inflation/interest rates, but again if the dollar stays same relative to all other currencies & asset classes, this is not the same as "dollar collapse". I am making statements but really asking questions.
I never quite understood why the Euro is supposed to be weak because of Spain and Italy “lagging behind” Germany.
According to all current forecasts, Spanish and Italian GDP is affected somewhat less by the current crisis than Germany’s GDP, in spite of Spain’s massive real estate bust, for the simple reason that the German export industry excels at producing stuff that a world in deep recession doesn’t need.
If there is any fundamental reason for a weak Euro, it’s the weakness of Germany’s export industry in the months to come. With Germany’s current account surplus shrinking rapidly, the once balanced Euroland current account will most likely turn significantly negative unless the Euro stays weak.
As for inflation: Currently, there is strong deflationary pressure in the US. In Euroland, deflationary pressure is much lower because of all sorts of price and wage rigidities (for instance, recent German wage deals have seen 2-3 % wage hikes in various industries). So the US is currently gaining competitiveness if the exchange-rate stays constant.
Sure, current US policies might lead to massive US inflation in the mid-term. But that doesn’t change the fact that US prices are falling, whereas Euroland prices are essentially flat (and would still be rising if it weren’t for the massively cheaper oil).
I grew up in a small New Hampshire town. We had a ball-bearing factory, textile and paper mills. Within 15 years leading to the early 2000s, they were all gone. A few retail and debt-collection agencies sprung up in their place to employ the leftovers.
Fast forward to 2009 and I'm living in Austria. We still have industry here and recorded a 12 billion euro current account surplus. I know the long story about banking in eastern Europe and it's partly true, however I'll tell you this:
We here are profoundly better prepared for the paradigm change upon us. We have >50% hydro-electric, nationwide public transport and an agricultural economy that produces 90 percent of Vienna's winter tomatoes within city limits.
Which is to say, the talk about Euro stability is noise disrupting the signal. What you really need to know is that society is more cohesive and fashioned to a survive crisis in Europe than it is in say, New Hampshire. Why? Because the people here still have a deep historical memory of what a crisis is. World War II, anyone?
Like the saying goes: America: It went from barbarism to decadence without building a civilization.
As a transplanted American in Europe, I can report that civilization does indeed exist. Short the euro. Fine. We'll still be drinking home-grown Gruener Vetliener, riding the Semmeringbahn and eating the sainted schweinschnitzel while the speculator class is agonizing over fictitious assets.
Get your hands dirty, for crying out loud. Build something…
“Fast forward to 2009 and I’m living in Austria. We still have industry here and recorded a 12 billion euro current account surplus. I know the long story about banking in eastern Europe and it’s partly true, however I’ll tell you this….”
Oh please do tell. Let me see, what all those Eastern European ’emerging’ countries are doing right now is getting ready to stick it to you Austrians for the stupid loans to you made to them.
Yea, I can hardly wait to see how much better you do than the U.S. alright.
AM
Jonathan: We here are profoundly better prepared for the paradigm change upon us.[…] As a transplanted American in Europe, I can report that civilization does indeed exist.
And, what are you going to do when Putin shuts off the gas faucets again?
Hahaha. What Europe, what civilization, my friend? Is Greece also part of your “civilization?” Or, are they going to become part of it as soon as they build their first real freeway? How about Southern Italy, Southern Spain, large parts of France? Are those Europe too? Have you visited Napoli? Those are almost third world places, more backward than Eastern Europe.
As far as your beloved Austria, granted, it is a nice country, and well managed (less so those crazy loans to Eastern Europe). But as a former dweller in the birthplace of Hitler, I recommend that every day you take an accurate assessment of the true level of Fascism in that nation. And, when it becomes unbearable, or when they start rounding up foreigners again, you cling on to that American passport, and run for cover to the U.S. embassy, begging them to get you out. Hang on to your American passport, my friend.
Yeah, I’m going to Vienna next week too, basically to buy a few gold coins from the Mint by Stadpark. Heck, I’ll even have some 6 Euro Apfelstrudel at Café Landtmann, where Sigmund Freud had his. Sure, I’ll even drink a few 5 Euro a cup Mélanges at Julius Meinl. But at the end of the day, when all hell breaks loose, and the EU starts collapsing, I highly recommend to you a place commonly called New Hampshire… :)
Vinny GOLDberg
Speaking of decoupling. I don’t hear many here speak of the decoupling of the European Union. Or, the break up of it. They failed twice to pass a constitution, and the current treaty is weak, perhaps too weak to make it through this crises. If Germany manages to switch from an export-dependent economy (tough job, I know), then why would they want to be part of the Euro Zone anymore? There are no real benefit for being in a monetary union with places like Spain, Portugal, Greeece, and Italy, when beach property is nicer and cheaper in Florida.
Vinny Goldberg
More likely the Euro and the banking system that administers it folds. The US taxpayer can not afford to keep propping the Euro up via swaps.
Jonathan makes excellent points about the fundamentals of Austria, which apply to much of Europe more or less. “Europe is toast” but people won’t be knifing one another over rabbit skins. In addition to the sensible infrastructure there is a deep social cohesion (thus the broad appeal of the anti-immigrant right).
Vinny: “[Europe’s south] are almost third world places, more backward than Eastern Europe.”
From several perspectives this is also true of a large portion of the US, but Europe’s south has many hundreds years of shared experience, withered but living small-holder agrarian roots, and relatively recent experience of economic chaos in the post-war years as Jonathan points out.
All of Europe, aside from the giant metropolises of Paris and London, will continue to be good places to raise a family.
Nevertheless Europe will be subject to tremendous economic chaos. America will be the anchor in the storm, not a firm anchor as it drags and catches but the anchor even so. And the essential will continue to be the East Asia/US dynamic.
Vinny,
you have not been places in the u.s.: try those: western virginia, south carolina, north & south dacota, idaho. subsistence agriculture is the norm there.
Quote from above: “How about Southern Italy, Southern Spain, large parts of France? … Those are almost third world places, more backward than Eastern Europe.”
I somehow doubt that you have ever been to Southern Spain or those unspecified “large parts” of France. And even Napoli, for all its obvious faults, is certainly not Bulgaria or the Ukraine.
Vinny, my friend — you’re paying way, way too much for coffee and cake when you come to Vienna. Meinl and Landtmann are tourist traps for rich Americans and Russian oligarchs. Tweet me at “virtualnomad” next time you’re in town and I’ll set you up with some real gemutlichkeit;-:
As an American expat who’s lived in Belgium for 10 years and in some neighboring countries for a year or so, Jonathan’s post and its answers are interesting. For an American, one mind-blowing thing about Europe is how it’s really a collection of different cultures, sometimes only a few miles apart. Even though I’ve been here 12 years in total, I could hardly generalize about where I am, much less about places like Italy or Poland.
America seems much more uniform in products, attitudes, and customs. It will stand or fall as a unit. Europe’s strength (or weakness) is in its decentralization of power. The individual states still control their own countries, unlike the U.S. states, which long ago became merely another layer of bureaucracy.