Return of the Euro
Written by Boris Schlossberg Senior Currency Strategist
Monday, 06 June 2005 GMT
Well it sure must have been fun for the dollar bulls. The unit gained an
astounding 13 cents against the euro in merely 2 months and reversed the
whole euro rally of late 2004. At that time Newsweek came out with its
infamous “The Incredible Shrinking Dollar” cover story proving once again
that there are no worse traders than the popular press. Of course now that
the tide has turned we are waiting for the Time magazine article to
solemnly proclaim “The End of the Euro!” which will no doubt mark the top
of the dollar rally
Meanwhile, the euro seems to need no help from mass media as the unit is
recovering smartly in European session tonight buoyed by a recovery in
Retail PMI figures which have moved back up above the 50 expansionary
level to 50.2. In fact Germany’s retail sales jumped to the highest
reading in 5 months while French numbers increased for the 1st time in 4
months.
Talk, both in Europe and US is turning to interest rate policy with
European officials suggesting that ECB lower it ‘s benchmark rate while
some analysts project that US may soon cease hiking the Fed funds rate
further. German Deputy Finance Minister Pfaffenbach was the latest
European politician to press the ECB for a rate cut in a Bloomberg TV
interview tonight. We doubt that ECB will be swayed by the rhetoric, given
that the euro has already declined by 1300 points and may have already
done the stimulative work for the bank. However, even if it does lower
rates the ECB rate cut is unlikely to be more than 25bp. The ECB is far
more concerned with price stability rather than spurring growth and is
loathe to enact inflationary policies. In US meanwhile traders will follow
Alan Greenspan’s testimony to Congress on Thursday to ascertain if last
Friday’s soft NFP figures may have tempered his enthusiasm for additional
rate hikes. If US is indeed in the final phase of its tightening cycle
then the carry trade advantage enjoyed by the greenback may soon lose its
luster, and the market will begin refocusing on US’s deteriorating Balance
Sheet position.
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