Morgan Stanley analyst Sophia Drossos says shorting the euro and going long on the dollar is likely to make money across a wide range of economic scenarios in 2010.
Long U.S. dollar "is a trade that can work in environments of risk aversion as well as stronger global growth,” Drossos notes.
“Because we believe a revival in the global economy will be led by U.S. growth outperformance against G4 economies … one way to express this view is to short" the euro versus the U.S. dollar.
“Continued concerns regarding fiscal frictions in the Euro zone are an important headwind to the euro that would likely be magnified in a prolonged bout of risk reduction.”
Remember that euro zone financial problems appear to be multiplying, Drossos counsels, adding that the Morgan Stanley Global Risk Demand Index, the firm’s proprietary measure of risk appetite, recently dropped into negative territory for the first time since early November.
“But negative readings on the GRDI over the past 12 months have been infrequent and short-lived,” she says.
“Indeed, the fundamental backdrop of rebounding global growth and still ample global liquidity has been conducive to solid risk appetite.”
Investor sentiment for the euro deteriorated after rating agency Standard & Poor's said it no longer classified the U.K. among the most stable and low risk banking systems globally.
"The focus of the foreign exchange markets at the moment is on the sovereign debt," Simon Derrick, chief currency strategist at BNY Mellon, told The Wall Street Journal.
"Comments by the S&P just adds to the concerns and make its life even more difficult for" the euro, at a time when investors are risk averse and looking for safety and security.
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