Why is the euro still strong?

November 10, 2011

One of the more bizarre aspects of the euro zone crisis is that the currency in question — the euro — has actually not had that bad a year, certainly against the dollar. Even with Greece on the brink and Italy sending ripples of fear across financial markets, the single currency is still up  1.4 percent against the greenback for the year to date.

There are lots of reasons for this. The dollar is subject to its country’s own debt crisis, negligible interest rates and various forms of quantitative easing money printing — all of which weaken FX demand. There is also some evidence that euro investors are bring their money home, as the super-low yields on 10-year German bonds attest.

Finally — and this is a bit of a stretch — some investors reckon that if a hard core euro emerges from the current debacle, it could be a buy. Thanos Papasavvas, head of currency management at Investec Asset Management, says:

Let’s assume there is some sort of breakup … if the euro is the currency of a potentially core set of economies, then it would be an incredibly strong currency

Of course, there is the question of whether $1.36 or thereabouts represents a strong euro against the dollar.  Lots of people, for example, tend to judge it by the $1.17 rate at which the euro was introduced.  But the following graph suggests that if you give the euro a longer historical life, it is not all that much above its average value. Still higher than some might have expected give the crisis that is threatening it entire survival.

 

 

 

 

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  • About Jeremy

    "Chief Desk Editor, Economics & Markets, based in London. Previously European Investment Correspondent, Bureau Chief for Greece and Cyprus in Athens and Senior Correspondent for the European Union in Brussels. Began career covering U.S. politics in Washington D.C."
    Joined Reuters:
    1990
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    Awards:
    State Street Investment Correspondent of the Year, 2007
    Part of Emmy-nominated team for
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