In the aftermath of Japan’s crisis, the euro has not only fallen against the yen but failed to make any headway against the dollar.
Go figure.
If anything, the compromise decision by European Union leaders to extend the European Financial Stability Facility and perhaps bring an end to the sovereign-debt crisis should make an early rise in euro-zone interest rates more likely.
With the funding costs of peripheral debtor nations on the slide since the compromise was reached, the European Central Bank will be far less worried about increasing rates by 25 basis points next month.
Higher rates, along with the reduced risk of a sovereign-debt default, should make the euro more attractive.
But there are three reasons why this may not be happening.
First is that compromise agreement. Despite initial optimism over the accord, there are reports of disagreement among finance ministers about implementation and concerns that the whole package still lacks any real teeth to stop member nations from falling short of achieving their fiscal goals.
In fact, a certain amount of skepticism has gradually crept in. The strategy team at Commerzbank sums it up:
“It seems increasingly likely that the measures [to be] announced on March 24/25 will not really satisfy the foreign exchange markets. Instead it can be expected that there will be more quantity than quality.”
The other two reasons why the euro might not be getting support are due to Japan.
The first is the immediate rush to safe havens that news of the earthquake and subsequent tsunami triggered. Traditionally, the single currency suffers under these conditions as it is still seen as the most risky of the major currencies. It has lost out even against the yen, despite the scale of the disaster in Japan continuing to grow.
The third reason why the euro could be failing to attract support is a possible shift in market sentiment as the threat of radiation from the explosions at the Fukushima nuclear plants creates serius concerns.
With the Nikkei index falling 20% this week and much of the country at a standstill, there are now fears that global growth in general will be affected.
This already seems to be reflected in the price of crude oil, which, after weeks of rallying in response to tensions in the Middle East, is showing signs of retreat as economists reassess their outlook for global energy demand.
If that is the case, investor decisions, which were recently being driven by expectations of higher interest rates, could also change.
Instead of higher yields, investors will be looking for higher growth, and the single currency, backed by a hawkish ECB, may well find itself falling swiftly out of favor.
Source: http://blogs.wsj.com
Go figure.
If anything, the compromise decision by European Union leaders to extend the European Financial Stability Facility and perhaps bring an end to the sovereign-debt crisis should make an early rise in euro-zone interest rates more likely.
With the funding costs of peripheral debtor nations on the slide since the compromise was reached, the European Central Bank will be far less worried about increasing rates by 25 basis points next month.
Higher rates, along with the reduced risk of a sovereign-debt default, should make the euro more attractive.
But there are three reasons why this may not be happening.
First is that compromise agreement. Despite initial optimism over the accord, there are reports of disagreement among finance ministers about implementation and concerns that the whole package still lacks any real teeth to stop member nations from falling short of achieving their fiscal goals.
In fact, a certain amount of skepticism has gradually crept in. The strategy team at Commerzbank sums it up:
“It seems increasingly likely that the measures [to be] announced on March 24/25 will not really satisfy the foreign exchange markets. Instead it can be expected that there will be more quantity than quality.”
The other two reasons why the euro might not be getting support are due to Japan.
The first is the immediate rush to safe havens that news of the earthquake and subsequent tsunami triggered. Traditionally, the single currency suffers under these conditions as it is still seen as the most risky of the major currencies. It has lost out even against the yen, despite the scale of the disaster in Japan continuing to grow.
The third reason why the euro could be failing to attract support is a possible shift in market sentiment as the threat of radiation from the explosions at the Fukushima nuclear plants creates serius concerns.
With the Nikkei index falling 20% this week and much of the country at a standstill, there are now fears that global growth in general will be affected.
This already seems to be reflected in the price of crude oil, which, after weeks of rallying in response to tensions in the Middle East, is showing signs of retreat as economists reassess their outlook for global energy demand.
If that is the case, investor decisions, which were recently being driven by expectations of higher interest rates, could also change.
Instead of higher yields, investors will be looking for higher growth, and the single currency, backed by a hawkish ECB, may well find itself falling swiftly out of favor.
Source: http://blogs.wsj.com
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