In These New Times

Katie Martin

wall street journal blog

23rd September, 2010

See? Told you so.

“Ohhhhh… it’s all gone quiet over there! And it’s all gone quiet over there!”

Currencies research has started to sound a bit like a football chant, as the small band of brave analysts who stuck with the euro in its darkest hours enjoy their big “I told you so” moment. (Other football chants would work here, too, but few are suitable for our readers’ delicate ears.)

While many market-watchers got caught up in the adrenalin-fueled depths of the Greek debt crisis, and rushed to predict that the currency would fall to parity against the dollar, or at least to $1.15, a handful stood firm: the teams at Deutsche Bank and HSBC spring to mind.

Now, these analysts were not necessarily the most popular people in the office at that point. Instead, they were beset by shouty traders keen to suggest, and not necessarily in the politest terms, that they were wrong. Still, while the euro’s cheerleaders accepted that the situation for the currency was grim, they stuck by the idea that the outlook for the dollar wasn’t looking so hot either.

Now is their moment of glory, as a blast of nerves around the U.S. economy creates a wave of dollar selling, pushing the euro up to around $1.34, to mark a sparkling 12% rally since early June.

“What happened to the plethora of people looking for the euro to reach parity against the dollar?” asks Paul Mackel, an analyst at HSBC in London. “Now the market has turned 180 degrees.”

Mackel reckons that the euro will end this year at about $1.35, having always expected a pickup for the currency after its springtime drubbing.

New fans of the euro certainly seem to be emerging at a rapid pace since the Federal Reserve gave its clearest signal to date this week that it might ease monetary policy even further in an effort to support the soggy U.S. economy–a slam-dunk basis for a dollar decline.

Wednesday, the analysts at Citigroup prepared a research note for clients outlining “nine reasons to buy the euro.” Nine? Few could think of one in April or May.

Thursday, Commerzbank mused that “the only way is up” for the 16-country currency. It expects to see the euro rise towards $1.39 by the end of the year–a prospect that would have been met with bellyache-inducing laughter a few months ago.

Even the team at BNP Paribas, who once predicted that the euro would sink below parity in the early part of next year, now thinks the currency is likely to hold in a range of $1.38 to $1.41 for now.

So, what has gone right for the euro?

Not much. And that’s why its doubters are still feeling reasonably confident.

As Mackel says:

“This is not because of anything fantastic occurring in the euro zone. But remember that the euro is the ‘anti dollar’. When the dollar is weak, by default the ‘anti-dollar’ does well.”

In other words, the euro is the best-looking horse in the glue factory right now.

And what else can dollar doubters buy instead? The yen? That’s tough, with the risk of further intervention by the Japanese authorities. Sterling? Er, no–the U.K. is probably heading the same way as its transatlantic cousin. The Australian dollar? Maybe, but it has already had an amazing run. Pinch your nose, and buy euros.

The overwhelming consensus is that something really horrible will happen to the euro at some point in the next year or two. Something new will once again pull open the cracks in the currency’s structure. One bad headline, one slip-up by a shaky euro state, and the euro bashing will start again in earnest. But even those who truly believe in that dogma can’t predict when it will happen. The dollar’s woes, by contrast, are easier to understand and predict. And currencies traders generally like to keep things simple.

The buck looks set to be the market’s whipping boy for now, while the euro’s longtime defenders try and convince their bosses that no luck whatsoever was involved in their successful calls.