Euro vs. Dollar: Who’s the Ugliest One of All?
The euro may be winning the unpopularity contest in the markets at the moment, but the dollar is close behind, according to David Bloom, head of foreign exchange strategy at HSBC.
He described the euro , which has continued its medium-term fall against the dollar this year after rallying slightly in February and June, as “the ugliest of all” — but maintained the U.S. dollar is far from beautiful.
The Eurodollar is also becoming less effective as a benchmark as investors move away from both currencies, Bloom argued.
“Investors are abandoning the euro and the dollar. We’ve been focusing on the Eurodollar as the bellwether but if you look at the dollar against other currencies like the Australian dollar or the rand, it’s actually weakening,” he told CNBC’s “Squawk Box Europe” Friday.
“You’ve got the ugliest of all, which is the euro, but the dollar is starting to look quite ugly as well. The Eurodollar as a benchmark isn’t working — people are selling the U.S. dollar now too because we’re heading towards elections and the fiscal cliff.”
“We’re stuck between Europe and the U.S. QE 3, 4, 5 – it’s like the Rocky movies!” he said, referring to a third, fourth or even fifth round of quantitative easing.
He is far from the only currency expert to warn against the euro. In the absence of any headline-grabbing meetings or summits in the euro zone this week, markets’ attention has turned elsewhere – but risks remain (click here for a slideshow on the world's most indebted nations).
“We still have plenty of event risk up ahead in the euro zone – the German constitutional court for starters – and the chance of a full-fledged (troika) program in Spain,” Geoffrey Yu, currency strategist at UBS, told CNBC.
“The euro is being considered more as a funding currency and people aren’t trading much off euro-specific news. Looking at our volumes in the past week, people are packing up for the summer.
Politics in the developed world are going to keep their grip on markets and currencies, according to Bloom.
“Politics is the new economics. There’s no longer this laissez faire attitude to free markets,” he said.
“Look at the Swiss. They have made a political decision to keep manufacturing jobs and its costing them to keep the franc low.”
The Swiss National Bank is buying bonds in an effort to keep the Swiss franc at a level which will not put companies off investing in jobs in the country.
New safe havens are emerging from the mire, with Nordic currencies like the Swedish krona , which recently hit a 10 year high against the euro, performing well.
“We’re trying to find beauty in this world of ugly. Sweden has turned the corner. It’s the rose amongst the thorns,” Bloom said.
“The market has switched on to this change already, but we think that it’s right to continue buying it.”
There are some who believe that the krona has already come too far and now is the time to sell, including analysts at Nomura, who issued a sell note on the currency earlier this week.
The Australian dollar has also strengthened, but is more vulnerable than most global currencies to any slowdown in China because of the Australian economy’s dependence on commodities.
“A lot of clients are finding the Aussie difficult to sell right now,” Yu said.
“If the money does flow in Australia’s direction (from China), it’ll be hard to fight. If clients want a commodity-linked currency, the Aussie seems the best place to go.”