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Euro's Woes May Be Shortlived, Strategist Says

Tuesday, 10 May 2011 | 11:01 AM ET
Euro bills and U.S. dollars being exchanged
AP
Euro bills and U.S. dollars being exchanged

The euro has dropped more than 5% against the dollar in a matter of days. But this strategist says it won't last.

How about that single currency? After a rapid rise to bump up against $1.50, the euro has traded dropped near $1.425 on worries about sovereign debt problems. For traders who have finished licking their wounds, it's time to sort out where the euro is headed from here.

David Watt, senior fixed-income and currency strategist for RBC Capital Markets, doesn't believe the euro's current weakness reflects a serious change in sentiment - but he does believe a number of investors got burned when the currency dropped so quickly.

The latest data on currency futures show that investors have been very long the euro - longer than they have been since 2007. Meanwhile, there have been over 100,000 net short futures contracts on the dollar every week but one this year, a situation with "an element of 'throwing in the towel,'" Watt said.

"I think this is going to be more of a clearout" for those overextended positions, Watt told me. "There is still more yield and rate support for the euro. We're still going to be talking about European Central Bank rate hikes before we say anything about the Fed."

Watt believes much of the concern about sovereign debt problems relates to the possible deterioration of Spain's financial position, since Spain's economy dwarfs those of the countries already receiving financial aid. But in the recent news about Greece, Watt said, there was nothing that changed Spain's prospects.

Still, Watt is cautious about just how much ground the euro could regain. "There has to be some upside limit," he said. Pointing to the $1.51 the euro reached before the sovereign debt crisis erupted last year, he asked, "Does it really make a lot of sense for the euro to be at those kinds of levels?"

You be the judge.

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