Photo: Flickr | DonkeyHotey
The euro has been incredibly strong lately, despite the fact that the outcome of the eurozone crisis remains uncertain and the drama never ends around the terms of the second Greek bailout.So what’s going on?
Tommy Molloy, chief dealer on the trading floor of FX Solutions, told us that there are four good reasons for the euro to hear “nothing but bad news and [do] nothing but go higher”:
- Lately, Southeast Asian central banks have been building up their domestic reserves and diversifying their reserve portfolios. Dollars are their main purchase, but they’re also buying euros and even British sterling.
- The Middle East has traditionally been a key buyer of euros, and the fact that oil is now selling above $100 per barrel means they have cash to spendâ€”particularly when the euro is cheap.Â Molloy explained, “The amount of euro appetite from the Middle East has been notable on any dips below $1.30.”
- The market is extremely short of euros right now. “If you put a gun to anybody’s head and say, ‘Are you buying or selling [euros],’ you have to say sell it,” Molloy told us. “This suggests that a weak side is the upside.”
- European banks, corporates, and Industrials are all repatriating their funds from abroad to strengthen the appearance of their balance sheets. As these transactions go through, this produces euro strength despite the fact that the cause is economic weakness.
Ultimately, these four developments show up as euro strength in the short term.
That said, that doesn’t mean the euro is fundamentally strong. In fact, Molloy pegged the purchasing power of a euro at around $1.20.