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Has Draghi Put the Euro in No-Man's Land?

Dhara Ranasinghe|Senior Writer
Friday, 3 Aug 2012 | 4:59 AM ET

The European Central Bank(ECB) may have warned markets not to bet on a break-up of the euro zone, but it did little to back it up with action on Thursday sending the already battered euro into further decline.

Euro coins in hand
AP
Euro coins in hand

The euro hit record lows against the Australian and New Zealand dollars in Asian trade on Friday and the currency dropped sharply versus the U.S. dollar after the ECB disappointed markets looking for immediate action to end the euro zone debt crisis.

“The euro is in no-man’s land for the moment as the uncertainty continues,” said Shane Oliver, Head of Investment Strategy at AMP Capital. “We’re heading in the right direction in terms of positive action from the ECB, but the negative is that we have to wait,” he said.

ECB President Mario Draghi on Thursday suggested any action from the ECB to start buying government bonds to lower crippling borrowings costs in Spain and Italy would not come before September and was contingent on governments activating euro zone bailout funds to join the ECB in bond buying.

“The uncertainty means the market will remain uncomfortable holding the euro,” said Timothy Riddell, Head of Asian FX Strategy at ANZ in Singapore.

Investors betting on immediate action after Draghi pledged last week to do whatever it takes to protect the euro were disappointed.

Draghi Has Put a Gun to Politicians Heads: Pro
"I think Mario Draghi has helped focus the minds of the politicians, the danger was that even if Spain and Italy did the right thing there wasn't enough fire power in the EFSF or ESM, Draghi said if you do the right thing I'm going to come in and help you, so he has effectively put a gun to their head," Bhanu Baweja, global head of EM research at UBS, told CNBC.

“The problem that Draghi’s got now is that he has really destroyed his credibility; to come out with big noise and then to come out with nothing has only put him in a position where markets will say, well what’s he going to say next and can we believe him?,” Richard Harris, Chief Executive of Port Shelter Investment Management told CNBC Asia’s “The Call” on Friday.

The euro has been the worst performing major currency so far this year, racking up losses of more than five percent against the dollar and sterling. It has shed some 13 percent against Japan’s yen since April.

Don’t Short the Euro?

Despite its recent dismal performance some analysts say the single currency might be a good bet in the longer term.

The fact that the ECB will buy bonds at some point and is committed to not let the 17-member euro zone break up are all positive for the currency.

“There is room to short it (the euro) but not too much room, I would be extremely surprised if the euro went below parity (against the dollar),” Harris said, in reply to a question on whether he would take a position in the market on the euro going lower.

“I think the Europeans are strangely on track with their project. They have raised money. What we’re waiting for is for the Germans to relax their stranglehold on a lot of that money; they are going to have to let some of that money drip out and when that happens that will be quite positive (for the euro),” Harris said.

Panic gripped markets last week when soaring bond yields in Spain heightened concerns about the future of the euro zone and sent the euro to a two-year low against the dollar, forcing Draghi to step in with some tough talk to calm investors.

“They (the ECB) are going to buy assets… they are going to increase it to the point that they will break the back of the shorts,” Michael Yoshikami, Founder and CEO of Destination Wealth Management told CNBC Asia’s“Squawk Box.”

- By CNBC's Dhara Ranasinghe

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