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Euro's Supreme Reign Has Ended

By    |   Wednesday, 03 Mar 2010 01:52 PM

We are in familiar territory again, now that the Justice Department has launched an investigation into whether hedge funds might have acted together to bet against the euro.

In the United Kingdom, Lord Turner is calling for an investigation into speculative positions in financial instruments that gain from a fall in the prices of sovereign and corporate debt.

Whenever unwanted currency movements occur, it has become more or less the norm to blame speculators whenever and wherever currencies and sovereigns get into trouble.

This has been especially true since 1992, when the U.K. left the European Exchange Rate Mechanism (ERM) that had been introduced by the European Community in March 1979 as part of the European Monetary System (EMS) that aimed to reduce exchange-rate variability and achieve monetary stability in Europe in preparation for the introduction of a single currency, the euro, which made its debut Jan. 1 1999.

When George Soros became famous in 1992 as “the man who broke the Bank of England,” he was blamed for the U.K. leaving the ERM, and when the French franc was ejected from the ERM in 1993, “Anglo Saxon” speculators were blamed for the French problems.

During the 1997 Asian crisis, Malaysian Prime Minister Mahathir bin Mohamad accused Soros of saying he had used the wealth under his control to punish Asean, the Association of Southeast Asian Nations, for welcoming Myanmar as a member.

So, it seems like we’re seeing that kind of blame game all over again. And no public body dares, or seems to be able, to explain the structural issues that cause these crises of confidence among investors in the first place.

Remember, in 1992 the U.K. had entered the ERM at a far too high level while Germany, still struggling with the consequences of its reunification, was reluctant to cut rates to a level that would have been suitable for the U.K. economy at that moment.

The U.K. authorities’ complaints about “speculative” activity willingly ignored the point that the “assaults” on the pound sterling mainly took place because of inappropriate official policy actions in the U.K.

Today, again much is being made of the fact that the Commodity Futures Trading Commission (CFTC), an independent agency of the U. S. government, is positioning data to show record “short” euro positions.

No doubt these are facts but that certainly does not reflect the positioning of the investment community as a whole. Between the beginning of 2002 and the third quarter of 2009, global foreign exchange reserves have surged 275 percent from just more than $2 trillion to $7.5 trillion.

We know that almost all of this growth occurred in the foreign exchange reserves of emerging and developing nations and that 31 percent of the known allocation, which is basically everyone except China, has been directed into euros.

In addition, we should also note the holdings of the mutual and pension funds, which during the past decade have built up their euro holdings because of the persistently declining dollar.

From late 2001, when the dollar decline began to emerge, international holdings of the German bund (the German equivalent of U.S. Treasuries) among investors have been rising constantly, which demonstrates that the investment community remains, until now, structurally long the euro.

We could temporarily see a little jump by the euro. I still expect the euro to decline further in the longer term.

The reason for my bearishness on the euro is very simple.

Until now, I was convinced that Germany would always fight to protect the credibility of its fiscal and monetary policies.

Because the German government could “guarantee,” even on a small scale, the sovereign debt of another nation, I feel obliged to reassess how I’d look at the German sovereign debt itself because the prudence of the German finance ministry has been put in doubt.

In the future, we probably will have to factor in the finances of the nations that Germany could end up guaranteeing.

Until now, we could look at the euro as the “new German mark.”

I’m afraid this will be no longer be the case once the “guaranteeing” starts.

We will have to review the euro as a sum of all its member nations, as all euro member countries have seen their currencies converted at fixed rates to the euro.

We are at the brink of a significant reassessment of how we will have to look at the euro.

We probably will also have to take into account that part of the euro will also have to include the “new Greek drachma,” the “new Italian lira,” the “new Spanish peseta,” etc.

The decade of the strong euro as the “new German mark” is definitively over.

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HansParisis
We are in familiar territory again, now that the Justice Department has launched an investigation into whether hedge funds might have acted together to bet against the euro. In the United Kingdom, Lord Turner is calling for an investigation into speculative positions in...
hans,parisis,euro,mark
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2010-52-03
Wednesday, 03 Mar 2010 01:52 PM
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