Euro, Dollar in ‘Ugly Contest’ as Debt Crisis Deepens
The sovereign debt crises on both sides of the Atlantic has created what some analysts are calling an "ugliness contest" between the U.S. dollar and the euro, and experts remain split on which of the two currencies are a safer bet.
Standard & Poor’s downgrade of the U.S. sovereign rating has led to a flight to safety, which traditionally should boost the dollar against the euro.
But in early Monday trading in Asia, the euro was actually gaining, after the European Central Bank (ECB) announced it will "actively implement" its bond buying program to support the troubled public finances of Spain and Italy.
Andrew Su, CEO of commodities and currency trading broker at Compass Global Markets, believes that despite that rally, Europe's debt problems are more severe and the political challenges deeper than those faced in the U.S., making the euro a less attractive investment.
“What we should be focusing on is issues in Europe that relate to the cultural sense of entitlement that the Europeans have in terms of their need to have highly subsidized health, highly subsidized education," Su said.
Su thinks the euro zone is unlikely to succeed in enforcing much needed austerity measures in heavily indebted nations, and passing bailout packages in stronger euro zone countries.
"I think what we will see there is that over time, investors will find that buying the euro against the dollar is not the best idea,” he added
But others believe the euro zone is better placed than the U.S. in its ability to tackle debt.
“If you look at the aggregate numbers between the U.S. and euro zone, debt-to-GDP is higher in the U.S. than it is on aggregate in the euro zone. Those hard numbers are the telling difference between the two currencies,” Stuart Oakley, Head of Emerging Markets FX Trading at RBS said on Monday.
Oakley believes the euro is a better bet, especially because of the amount of liquidity created by the Federal Reserve's quantitative easing programs.
“I think the dollar wins the ugly contest because of the overwhelming supply of the US dollar, let’s remember the (Federal Reserve) printed way more dollars than the (European Central Bank) have printed euros and I think that in itself will be the real determining factor,” he said.
While Oakley and Su disagree about which of the two currencies is the "uglier" one, they do agree about what investors should be betting on.
Both believe the Singapore dollar and the Chinese yuan stand to benefit from weakness in the Euro and dollar.
“Both have got safe haven status, both have got sound monetary policy behind them,” Oakley said.