The always readable and affable Bill Gross from Pimco was back this week with an instalment of no less than 3 new articles hitting the web. One which caught our eye here at FX Strategy was titled ‘The Euro may fall – and take the U.S. recovery with it’.
The article begins by rightly pointing out that the current volatility in the EUR is due to the constant flow of conflicting news, announcements, data and the markets interpretation of all these. It’s an announcement by announcement see-saw as the EUR goes up and down with each latest development at the IMF, EU, ECB, G-5, S&P, and Fed Reserve. Gross then goes on to explore where both the EUR and the USD are headed. (As you’ll see, we came to much the same conclusion here at FX Strategy in our article Keynes vs Friedman published on 3 December 2011)
Gross thinks the EUR is most likely headed down, “perhaps significantly”. He sees little chance of the Euro zone being able to grow and indeed expects an extended recession to occur. “And as an economy declines, so too does its currency” he states.
Gross suggests that any recent support for the EUR has been due to higher yields than those available from USD, JPY and GBP which he does not see lasting as EUR yields will narrow as the ECB will have no choice but to start pumping money into the zone to battle deflation.
Of course, a declining EUR means a rising USD. However as Gross goes on to explain- “neither the US economy nor US stock market indexes will benefit from the euro’s decline. A declining euro means a rising dollar in relative terms, so our exports will necessarily become less competitive.”
This is an important observation to keep in mind in the medium term. As mentioned in the Keynes vs Friedman article latest data suggests the US economy in improving however a declining EUR will need to be watched closely for its effects on potentially snuffing out USA competitiveness.
For the full article by Gross go to: http://www.washingtonpost.com/opinions/the-euro-may-fall--and-take-the-us-recovery-with-it/2011/12/01/gIQAuTxOIO_story.html
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