For investors moving funds offshore into various asset classes, there is often the additional factor of selecting the appropriate currency. In terms of the two major currencies (the euro and US dollar), the question of which currency will be a better investment depends on which region has the larger fiscal woes. In other words, which region is facing the greatest risk due to massive government debt?
The euro, launched in January 1999, at first depreciated relative to the US dollar and then stabilised in 2001/2002 at about $0,95. It has generally appreciated over the years.
It reached a high in mid-July 2008 against the dollar at about $1,60, then declined for the remainder of the year, appreciating in 2009, but falling once again in recent months on concerns about the debt problems within member countries.
A Standard Bank foreign exchange report this week is looking for the euro/dollar to fall to 1,30 over the next month or two. The immediate concern is the debt in some euro countries.
Generally, eurozone budget news remains poor. There is a possibility that the first quarter GDP will fall back into negative territory. The consensus for the release of the fourth quarter 2009 GDP is 0,3%.
The graph below reflects the massive short positions in the euro -- ie, foreign exchange traders are expecting a further decline in the euro relative to the dollar.
Some of the bigger problem countries within the eurozone are Greece, Portugal, and Spain. The European Central Bank cannot afford a default on member country bonds, but at the same time they are limited to what backstop they can provide.
There is a special meeting of European leaders on February 11 to address the region’s economic woes. In the meantime, the world's financial markets are watching what action will come from this and how the EU and ECB deal with what could spin out to be a larger problem if Greece does default on its debt.
