Euro update 2012

Euro money 2

In view of the resurgence of concern about southern European – in particular Spanish – government debt, the euro could consider itself fortunate to have been able to hold its own against the US dollar. Its range of more than 15 cents between early October and late April was perhaps too wide for comfort but net movement over that period was zero.

At a pinch, the same could be said about the euro’s performance against the British pound over a rather longer period: on St George’s Day the euro was back to its position in August 2010. But where investors preference for the euro or the dollar was evenly distributed, sterling has recently attracted more support than both of them.

Whilst the economic links between Britain and the euro area are as close as they ever were, investors have begun to differentiate between the two. Part of this distinction is based on relative credit and political risk. The UK enjoys AAA credit ratings from all three of the main agencies: Only four of the 17 euro zone countries can say the same (Finland, Germany, Holland and Luxembourg). Investors believe the UK government will achieve a balanced budget through spending cuts and tax increases: They have minimal faith in Greece or Spain being able to do the same.

The other distinction between the UK and Euroland is in economic performance. Although Britain was technically in recession between September 2011 and March 2012, most of the recent UK indicators have been positive. Where Euroland reports slowing activity in manufacturing and services, Britain shows growth. The latest figures show retail sales rising and unemployment falling in the UK while the reverse happens in the euro zone.

The auspices favour the pound over the euro. Nevertheless, those needing to buy euros against sterling should consider taking advantage of a near 40-month high to fix a price for at least a proportion of their requirement. The euro could fall further; there is no guarantee that it will.