By Steve Johnson –
The euro held its ground on Monday in spite of mounting political turmoil across the eurozone.
Gerhard Schröder, the German chancellor, called for an early general election after seeing his Social Democratic party suffer a crushing defeat in its erstwhile stronghold of North-Rhine Westphalia, Germany’s most populous state.
Opinion polls also continued to show voters in France and the Netherlands are likely to reject the proposed EU constitution in forthcoming referendums.
But with German equities rising in the belief that an early election will speed Mr Schröder’s exit from power and accelerate the pace of economic reform, the euro actually firmed a fraction to $1.2568 against the US dollar, still near a seven-month low, and held steady at £0.6868 against sterling, while dipping just 0.3 per cent to Y135.36 against the yen.
“An incoming CDU government will have no excuses not to reform Germany,” said Hans Redeker, global head of forex strategy at BNP Paribas.
“I think this will be positive for Germany,” added Chris Towner, consultant at HIFX.
However the new Turkish lira fell 0.5 per cent to TL1.7365 against the euro on fresh fears that a French “no” vote could throw a spanner in the works of greater European integration and possibly delay Turkey’s entry into the EU.
The euro was aided by data from the US Commodity Futures Trading Commission that showed speculative net euro positions were at their shortest since December, reducing the scope for further shorting.
In contrast, net long positions on the dollar were at their most extreme since July 1999, jumping to $12bn as of May 17 from $0.7bn a week earlier.
This extreme positioning was seen as the prime cause of the dollar’s slight fall from grace on Monday, which occurred despite broadly positive dollar sentiment in the market.
“This is an extreme position in the dollar that we think has got even more extreme since,” said Tony Norfield, global head of forex strategy at ABN Amro.
“You would have to find good reasons to go long of the dollar from here, otherwise you would be risking that speculators may take profits.”
The dollar slipped 0.4 per cent to Y107.77 against the yen, 0.1 per cent to $1.8268 against sterling and 0.6 per cent to C$1.2588 against the Canadian dollar, but was still close to recent highs.
Despite this, many analysts are warming to the dollar, in the short term at least.
BNP Paribas on Monday cut its euro/dollar forecast for the end of the second quarter to $1.21 from $1.28, despite predicting a rate of $1.40 by 2006. Mr Redeker argued that the dollar was currently being helped by a “sea of liquidity”, with interest rate and yield differentials proving supportive in an environment where market returns have fallen to extremely low levels and real and leveraged accounts are hunting for investment opportunities.
Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi, pointed to the likelihood of dollar-positive news flow this week in the shape of US durable goods orders, a revision to first-quarter GDP, personal income growth data and the minutes of May’s Federal Open Market Committee meeting.
Chris Gothard, currencies strategist at Brown Brothers Harriman, added: “Compared to the miserable growth in Europe and inconsistent signs of recovery in Japan, the US offers an open book to investors.
“It is the only major nation in a rate-hike cycle and any sign of a soft patch in the economy has for now been swept away by positive jobs and retail sales reports. A reduction in the trade deficit seen in latest figures has put those particular worries into the background too.”
Source: Financial Times