Only QE3 or “a very benign euro zone outcome” would justify the euro’s high value against the dollar, writes Citi FX strategist Steve Englander in an investor note published today.
He also gives a 90% chance to a major Greek restructuring — with about a one in three chance that European measures fail to take accurate measures to stifle crisis.
He presents four outcomes for the sovereign debt crisis, and one for the U.S., and dictates the effect they would have on EUR/USD:
– “The euro zone finds a truly benign outcome for sovereign debt issues: Probability 10%, Result EURUSD +15%”
– “Greece has a major restructuring and the euro zone in a fashion puts in place measures to avert contagion and recapitalize banks: P 60%, R EURUSD -10%”
– “Greece has a major restructuring and the European policy authorities do not take adequate measures: P 30%, R EURUSD -20%”
– “US economic outcomes disappoint and the Fed puts in place QE3 or similar measures: P 40%; R EURUSD +10%”
– And potentially: “In which reserve managers might buy euros and possibly even sovereign debt if the ECB and EFSF made a commitment of the appropriate size to supporting the Italy, Spain and possibly peripherals other than Greece.“
Although Englander does point out the possibility of a dollar-negative action, he nonetheless calls the still-high price of the euro a “mystery.”
A steep drop in value of the euro against the dollar over the last month (not to mention today) suggests that currency traders are beginning to agree with him. Check out how far the euro has fallen over the last six months.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.