The euro is rallying of late on the heels of some OK debt auctions in Ireland and Portugal.
They’ve been nothing to write home about — the yields are still sky high — and the ECB has been very active in the debt markets of late, which further undermines the idea that all is clear.
So you have this seeming paradox of the euro rallying (it’s almost at $1.34) while the ECB is expanding its balance sheet and printing more euros to cover various sovereign debt auctions.
But actually this isn’t that weird. We predicted this would happen at the end of June.
Look, the big knock on the euro itself is that the system doesn’t work because you have these countries with their own Treasuries and sovereign debt issues, and a centralized bank that’s controlled by Germany, whose sovereign balance sheet is pretty healthy. The euro is structurally flawed, and the crisis has made that clear.
But an activist ECB goes some way towards clearing that concern up. Granted, there are still big problems in the short, medium, and long-terms, and again, the yields on Irish, Portuguese, and Greek debt confirm this. But the structural flaws of the euro aren’t so pronounced when the ECB is active, and that’s why the euro can rally even if the crisis persists.