Money in Motion

EU Summit Could Topple the Euro

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Investors seem hopeful that something will come of this latest euro zone confab. But be careful what you wish for.

It's a good day for the euro,  which is moving up ahead of Thursday's meeting of euro zone leaders. The theory seems to be that if the Germans come to the table, something real will be done about the sovereign debt crisis.

So the meeting should lift the euro, right? Not so fast, say these experts.

"Speculation of some agreement has helped lift the euro, peripheral bonds, and generally has underpinned the risk appetite in recent days," says Marc Chandler, global head of currency strategy for Brown Brothers Harriman. "This leaves the market vulnerable to disappointment or a "buy the rumor sell the fact" type of activity."

Chandler told me he would recommend selling the euro against the dollar if it approaches $1.43, which is close to the currency's 180-day moving average. Another approach would be to sell the euro against the Swiss franc, he says. The Swissie is strong by certain measures, but Chandler argues that the Swiss have a bad track record when it comes to intervening to stem the currency's rise. "They intervened massively  in 2009 and 210, and it horribly failed," he says.

David Woo, head of global rates and currencies research at Bank of America Merrill Lynch, thinks the euro has been helped this year by factors unrelated to the debt crisis, and warns that "Our analysis also suggests that these buffers may not last." He continues, "This suggests to us that the euro could soon fall prey to the crisis if policymakers fail to stabilize it."

Woo does not recommend selling the euro against the dollar, given the messy negotiations over the U.S. debt ceiling. But he does recommend buying the Canadian dollar and the Japanese yen against the euro.

The summit is Thursday. Get ready.

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