The beleaguered euro “fell like a stone” on Tuesday, breaching the €1.50 mark against sterling for the first time since August 2004.
The shared currency initially appeared to be in recovery mode, firming from Monday’s low of $1.2027 against the dollar to $1.2152, boosted by US economic data that most agreed was mildly dollar-negative.
US retail sales were unexpectedly soft in May, although an upward revision to April’s data largely balanced this out. Meanwhile producer price inflation was a little softer than expected, with the headline measure coming in at -0.6 per cent in May, while core PPI, stripping out fuel costs, edged up just 0.1 per cent.
“Both reports are, on face value, bullish for bonds and euro/dollar,” concluded Tom Levinson, economist at ING Financial Markets.
However, after a brief wobble, the dollar regained its composure and surged to a fresh nine-month high of $1.2023, 0.7 per cent higher on the day, by midday in New York.
Paul Mackel, currencies strategist at ABN Amro, said this was a mirror image of the fourth quarter of 2004, when even strong data could not help the dollar. This time round the dollar is rallying in spite of weak data, he argues.
Jes Black, hedge fund manager at Black Flag Capital Partners, attributed the dollar’s dive to comments from Caio Koch-Weser, the chair of the EU’s economic and finance committee, who said that there was “still considerable uncertainty as to the pace of recovery in euro area”. This was enough to give the market the excuse to retest the dollar’s highs, he argued.
However David Bloom, currency analyst at HSBC, argued that the euro’s fall was more disturbing still because there was essentially no newsflow behind it.
“The euro fell like a stone,” he said. “It’s like a weightlifter spending a lot of time lifting the euro up, only for it to crash down again.”
Thus the euro reversed earlier gains to sit 0.6 per cent lower at £0.6662 against sterling and 0.75 per cent softer at Y131.65 against the yen. Mr Bloom remains wary of the euro for now, believing it faces asymmetric risks – potentially falling further if the EU fails to agree a budget but gaining nothing if a deal is cobbled together.
However, like a number of analysts, he believes the euro will not weaken much more against the dollar. “I think we are in overshooting territory,” he said.
Steven Saywell, chief currencies strategist at Citigroup, advised taking profits on long-dollar positions. But Mr Mackel was a dissenting voice, saying it looked like “only a matter of time” before the extensive barriers said to be in place at $1.20 were breached, ushering in a move to $1.175.
Mr Black, who correctly predicted the euro would collapse to $1.20 by June in this column in February (when it was trading at $1.304) sees the euro trading in a range of $1.17 to $1.23 for now. However, he predicts that the US Federal Reserve will complete its rate tightening cycle in three months’ time, ending the dollar rally and potentially allowing the euro to return to its highs of $1.35 by the first quarter of 2006, despite the ongoing woes of the eurozone.
Sterling held steady at $1.8048 and Y197.57 in spite of the Royal Institution of Chartered Surveyors’ house price survey falling to its lowest level since November 1992. The pound was helped by comments from Mervyn King, Bank of England governor, who pointed to upside risks to inflation in a speech overnight. His comments “will dash growing expectations of a rate cut in July and possibly in August,” said Mitul Kotecha, global head of forex strategy at Calyon.
The Slovak koruna rose 0.6 per cent to a three-month high of SK38.405 to the euro as the governor of the central bank, said economic fundamentals suggested the koruna should firm.
