“Mysterious” Strength of Euro Currency Puzzles Analysts

Financial analysts and economists from around the world are baffled by how the euro currency has “mysteriously” remained relatively stable all year round, despite the mounting problems that have threatened to break up the eurozone region and its currency.

Financial analysts and economists from around the world are baffled by how the euro currency has “mysteriously” remained relatively stable all year round, despite the mounting problems that have threatened to break up the eurozone region and its currency.

[quote]”We struggle as a house to see why it (the euro) is where it is and also whether, in any situation, how it strengthens,” said UBS Head of European Equity Strategy, Nick Nelson, in an interview with Reuters on Tuesday.

“If you go the ECB QE (quantitative easing) way where you have a weaker currency, or if you get to a break up situation with panic that leaves you with a weaker currency.”[/quote]

Related: SOS – The Eurozone Can No Longer Save Themselves: Raghuram Rajan

Related: Europocalypse – Are The Days of The Eurozone Numbered?: Nouriel Roubini

But the opposite though has held true with the euro’s exchange rate index – measured against currencies of the bloc’s major trading partners –nearly two percent higher than it was last year.

According to the report, the euro is also currently at a level pretty much where it was before the whole credit crisis kicked off in 2007. In addition, the euro’s present exchange rate index still remains more than 20 percent higher than when the currency was first introduced in the streets in 2002.

Unsurprisingly, some of the world’s leading experts are perplexed at the situation.

“I find today’s relatively robust value for the euro somewhat mysterious,” said Harvard professor and former IMF chief economist Kenneth Rogoff. The persistence of largely mechanistic central bank reserve management, where the euro still attracts more than quarter of the $10 trillion hard cash reserves held by China and others, could be just one of the possible explanations for the euro’s strength, he claims.

Another possible explanation could be the fact that the European Central Bank had been pushing up its interest rates through the early part of this year, while other major economies were printing more money for their needs. However, this though would still see the euro weaken over time, as the ECB will no doubt ease further into a looming European recession.

Related: Higher Eurozone Interest Rates May Be a Foreign Investment Trap

Related: The Euro Zone’s Inbuilt Flaw: Rising Rates Punishes the Weak

Analysts have pointed to the example of the US dollar, which saw an initial surge in its value during the height of the Lehman Brothers bankruptcy in 2008, as a potential case study for the euro’s surprising stability.

Back then, the dollar increased in value despite the crunch in the US mortgage market followed by and dramatic policy easing from the Federal Reserve and Treasury. The nature of dollar financing worldwide meant that banks with structurally short dollar positions required one-off purchases to close out, fuelling a dollar exchange rate surge.

The case could be slightly similar in Europe, where funds fleeing peripheral euro zone sovereigns such as Greece, could find a “safe haven” in other European securities such as German government bonds with no net exchange rate implications.

HSBC currency strategists said on Monday that they believed the existing euro would pull through intact, while a “core” euro – made up of countries such as Germany, France, Netherlands and Austria – would rise once the initial turmoil abated.

Related: Eurozone Divorce Imminent: Nouriel Roubini

Related: Are France And Germany Planning A Smaller Eurozone?

“An exit by one or more peripheral countries from the euro would ultimately put the currency under upward pressure as the remaining euro would behave a bit more like the Swiss franc.”