Why hasn

4th September 2012

Despite Europe's debt crisis grinding on amid the possibility of a breakup of the Continent's currency union the euro has remained surprisingly resilient. So why hasn't the hemming and hawing among the region's leaders seen the currency take more of a beating?

With downgrades, poor data and ongoing uncertainty, the euro must weaken, right?

It seems not. Bloomberg reports that the euro traded near a two-month high against the dollar before the region's leaders meet to hold talks to address the debt crisis this month.

As pavlaki comments on Shaun Richards post, Mindful Money's economic blogger: "On the value of the euro – isn't it odd that the euro has not collapsed further given the cascade of bad news coming out of the Euro zone. The one thing that might help them isn't happening. Any thoughts on why?"

It seems this has a lot to do with there being little choice among major currencies at present.  

Shaun Richards replies:

"As to the exchange rate issue the reason why the Euro has not fallen further and has rallied to 1.26 versus the US dollar there are two reasons:"

1. Many of the other currencies are weak with the US $ worrying about QE3 and the UK economy hardly supports a strong £. So this area is a type of height contest amongst relative pygmies.

2. If we move to the stronger currencies we see that the Yen strength is affecting the Japanese economy and the Swiss are buying all the Euros that anybody wishes to sell against the Swiss Franc.

So in my opinion the problem is once you decide that you wish to sell the euro you have the problem of what to buy…

The euro is the second most liquid currency in the world, and most reserve and central banks have billions of euros stashed away in the vaults, and as Shaun notes the reason for the euro's stoic stability is that the alternatives are not much better.

Also, not all the news has been bad. Despite the dithering across the Continent, Europe's leadership managed to put together a bailout for Greece, and the European Central Bank propped up commercial banks with €1 trillion in three-year loans, among other events.

The euro may not be the most lucrative currency from an interest rate perspective, although a 0.75% base interest rate is still above the UK's 0.5%.

So why is now a ‘pivotal point'?

After a lull in the eurozone crisis over the summer, September and October events have the potential to spark it back into life. There is the audit on Greece's finances, and the potential of a downgrade of Spain to junk status, among others.

The representatives of the IMF, the EU and the ECB are returning to Athens to conclude their evaluation of Greece's long-term growth prospects and to see how the debt-reduction plan is going.

However, as asset manager Schroders notes there is the "possibility of a better than expected outcome in the Eurozone following Mario Draghi's comment that he would do whatever it takes to preserve the Euro."

"Investors are looking at a number of events in September that present both upside and downside risks. The German Constitutional Court's ruling favourably on the ESM treaty and fiscal compact could enable the ESM and ECB to take stronger action in markets.

"In addition, the Troika is set to report on Greek progress which raises the chance of an early ‘Grexit', but we think this will be delayed until next year."

On September 12 German leaders will consider the legality of the bailout fund. On that day, the eight judges of Germany's Verfassungsgericht or Constitutional Court will file into the courtroom in the southwest city of Karlsruhe to decide whether German President Joachim Gauck can sign into law the eurozone's crisis-fighting tools.

Watch this space – the next few months promise to put pressure on a so far resilient euro…


More on Mindful Money:

Eurozone PMIs – Reasons to be cheerful?

What happened to economic growth?

Has the EU failed its original agenda?

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