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While political uncertainty in Greece remains elevated and the odds of a split in the eurozone are increasing, the euro is trading at 1.27-1.28 against the dollar.This is well off it’s record low of 0.82 in 2000, but it could be doing a lot worse.
UBS strategist Syed Mansoor Mohi-uddin points to 4 key things that are supporting the strength of the euro:
- The ECB has not engaged in outright quantitative easing during the financial crisis. While, the Federal Reserve, Bank of Japan and the Bank of England have all cut interest rates to between 0 – 0.5 per cent, the ECB’s benchmark rate is at 1 per cent. Moreover, the Fed is likely to take on a third round of QE and the central banks of Japan and the UK have been printing money and buying government bonds.
- The eurozone has a balanced current account and doesn’t depend on foreign capital inflows to support the euro.
- High oil prices have seen petro-dollars increase in the sovereign wealth funds of countries in the Middle East and North Africa and these are diversifying their new foreign reserves into eurozone markets.
- Eurozone banks have been selling foreign assets because they are under pressure to recapitalize. As these banks shrink their balance sheets they are likely to cut new loans, including those from abroad and that repatriation flow is supporting the euro.
Mohi-uddin says the euro is going to keep sliding lower because of the debt crisis and is expected to end the year at 1.15 against the dollar as long as the economic and monetary union doesn’t break up.
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