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Business News/ News / World/  Draghi loses war for growth with euro beating peers
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Draghi loses war for growth with euro beating peers

Euro has strengthened 4.1% in 2013 outpacing the krona’s 3.4% gain

Mario Draghi, president, European Central Bank. Photo: Bloomberg (Bloomberg)Premium
Mario Draghi, president, European Central Bank. Photo: Bloomberg
(Bloomberg)

London: The euro has overtaken Sweden’s krona as this year’s best performing major currency, revealing how far European Central Bank (ECB) president Mario Draghi is falling behind his contemporaries in the foreign-exchange wars.

The euro has strengthened 4.1% in 2013, the most among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes and outpacing the krona’s 3.4% gain. Strategists are raising their forecasts for the 17-nation currency, data compiled by Bloomberg show.

While the gains show investors are confident that Draghi and government officials are doing enough to hold the euro region together, they threaten the ability of member nations to export their way out of the longest recession on record. Goods sold to countries outside the region fell 0.8% in the first quarter from the previous three months, the European Union’s statistics office said on 5 June.

“The euro is confounding all its critics once again," said David Bloom, the global head of currency strategy at HSBC Holdings Plc in London. “With the threat of the ECB turning to negative interest rates, Draghi had a dabble in the war, though everyone else is cutting rates or intervening, and they’re all seeing their currencies weaken," he said.

Raising Estimates

Strategists are having a hard time keeping up with the gains. The composite estimate in a Bloomberg survey is for the euro to end the first quarter of next year at $1.28. While that’s below Tuesday’s level of $1.3331 as of 7:39 am in London, it’s up from the forecast of $1.26 in May.

The euro touched a four-month high of $1.3390 last week, and is about 10% above its lifetime average of $1.2141. It’s 7% too strong against the dollar, based on an index by the Organization for Economic Cooperation and Development (OECD) in Paris that uses relative costs of goods and services.

While Draghi cut the euro region’s main interest rate in May to a record 0.5% and said policy makers were considering a negative deposit rate, the bond-buying program the central bank unveiled in 2012 is yet to be activated. Draghi said on Tuesday that the central bank may use other tools.

“There are numerous other measures—standard interest rate policy and non-standard measures—that we can deploy and that we will deploy if circumstances warrant," Draghi said in a speech in Jerusalem. “Monetary policy will remain accommodative for as long as necessary."

European banks have paid back about €300 billion of the €1 trillion of three-year loans granted under its Longer Term Refinancing Operations in 2011, leaving the Frankfurt-based ECB’s balance sheet 18% smaller than at its peak in June 2012.

Buying Bonds

The US Federal Reserve is purchasing $85 billion of treasuries every month, boosting its balance sheet assets to $3.41 trillion from about $2.91 trillion in September. The Bank of Japan (BoJ) announced an unprecedented stimulus package this year that includes a plan to double the nation’s monetary base in two years, while the Bank of England (BoE) has also bought debt.

The euro’s strength has made Stephen Jen, the managing partner at SLJ Macro Partners LLP in London and the former head of foreign-exchange strategy at Morgan Stanley, reluctant to sell the currency, even though he thinks it should fall based on the performance of the economy.

The ECB has been harder to read than the Fed, the BoJ or the BoE, Jen said in an e-mailed response to questions. The euro is agitating to push lower, I believe. It’s been very hard to trade. Though a decline to $1.17 would represent a reasonable level for the euro, Jen said he doubts it will fall that far.

Shrinking Economy

Gross domestic product fell 0.2% in the first quarter, the EU’s statistics office in Luxembourg said on 5 June. Investment as measured by gross fixed capital formation dropped 1.6%, subtracting 0.3 percentage points off GDP.

Futures traders have decreased their bets that the euro will decline against the US dollar to the lowest level since 19 February, figures from the Washington-based Commodity Futures Trading Commission released on 14 June showed.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain—known as net shorts—was 7,533 contracts, compared with 51,621 a week earlier.

The shared currency also has been buoyed by gains in the region’s government bonds from Spain to Italy. The yield on Spain’s 10-year bond fell to 3.94% on 3 May, the lowest since May 2010, from 5.27% at the end of last year.

Bond Rally

“As risky assets do well, the euro does well," said Bill Street, the global co-head of active fixed income at State Street Global Advisors, which oversees about $2 trillion in assets. “Selling the euro was the classic de-risker, and this has been unwound. The euro’s strength can continue."

Much of the euro’s gains in 2013 have come this quarter, with the Bloomberg index trading at 99.1561 on Tuesday from 95.1156 at the end of March. This quarter would be the best for the currency since the index jumped 7.9% in the final three months of 2008.

The last time the currency appreciated for a full year was also in 2008, when the index gained 10% to 118.8433.

While the economies of Italy and Spain have contracted every quarter since the period ending September 2011, the slowdown is spreading to richer countries such as Germany, Europe’s largest economy.

The weak economy will weigh on the currency and force the central bank to take more measures, according to Societe General SA. France’s second-biggest bank recommends selling the shared currency against the US and Australian dollars.

“The rise in the euro isn’t welcome in an environment where the economy is lagging," Vincent Chaigneau, the bank’s global head of rates and foreign-exchange strategy in Paris, said. “I don’t think it’s sustainable and, fundamentally, it doesn’t make sense." Bloomberg

Lukanyo Mnyanda in Edinburgh contributed to this story.

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Published: 18 Jun 2013, 08:20 PM IST
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