Euro update 2011

Euro currency decreases

Most politicians and all national leaders in Euroland are adamant that the problem of Greece’s overdraft will soon be sorted. At the same time it is easy to find sceptics among Anglo-Saxon ex-politicians on both sides of the Atlantic: They see no sense in postponing what they see as the inevitable default and argue that lending yet more money to a spendthrift is like plying an alcoholic with booze.

Investors are doing their best to keep an open mind. On one hand they would much rather see the EU rescue attempt work than have to live with the consequences if it didn’t. On the other, they cannot help but fear what will happen when the EU handouts eventually stop. The uncertainty leads to frequent changes of sentiment towards the euro; the French president says it will all be alright and the euro goes up; an American investment bank says it will all end in tears and the euro goes down.

Sterling/euro has covered a range of six cents in the last six weeks with major changes of direction roughly once a week. Not all of those reversals have been down to the euro though. Sterling is still quite capable of shooting itself in the foot, as it did when the Bank of England’s monetary policy committee started talking again about increasing the asset purchase programme – quantitative easing or printing money if you would prefer.

At least the Federal Reserve has put a nail in the coffin of its asset purchase scheme. It will end in June and is unlikely to be repeated in the foreseeable future. It will mean one less downward pressure on the dollar; it will not necessarily reduce the volatility of euro/dollar, which has covered a nine-cent range in the last six weeks with half a dozen reversals.

Interest rates in Britain and the States are likely to remain very low beyond the end of the year. Euro interest rates are likely to go up. That distinction will tend to work in the euro’s favour but the advantage will be compromised by every new scare story about Greece.