Monday, July 14, 2008
For three years euro bulls used the prospect of higher interest rates in Europe to justify the currency’s 31 percent rally against the dollar. No more.
A growing number of the world’s biggest investors say a slowdown in the region’s economy may be more severe than in the U.S., forcing the European Central Bank to reverse this month’s rate increase. By January, the euro will be lower against the dollar, yen and even the pound, according to the median estimate of strategists surveyed by Bloomberg. Bill Gross, manager of the world’s biggest bond fund, turned bearish on the euro for the first time since the currency’s inception in 1999.
“We might have hit a point where the euro doesn’t have a lot to stand on,” said Emanuele Ravano, co-head of European strategy in London for Gross’s Pacific Investment Management Co., which runs the $129 billion Pimco Total Return Fund. “The euro is ultimately very overvalued. It could be quite a bit lower at some point in time over the next couple of years.”
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The euro fell as much as 1.7 percent to $1.5611 in the week following President Jean-Claude Trichet’s comments on July 3 that he had “no bias” on further changes in borrowing costs after boosting the main refinancing rate to 4.25 percent from 4 percent. Before Trichet spoke the currency traded near a record high on speculation the ECB would signal more than one rate increase was needed to tame inflation.
Hedge Funds Flee
As the odds that the ECB will lift rates dwindled, hedge funds sold the 15-nation common currency, according to Zurich- based UBS AG, the world’s second-biggest currency trader behind Deutsche Bank AG in Frankfurt. New York-based Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, said it’s “increasingly confident” the euro will fall.
“Capital flows look less supportive for the euro and, with the ECB out of the way, the interest-rate policy would also seem to support our view,” Stephen Hull, a strategist for Lehman in London, wrote in a research note July 11.
This article was posted: Monday, July 14, 2008 at 4:49 am