During the greenback’s recent 10 year slide, reserve managers across the globe have been shifting out of US dollars into Euros to diversify their portfolios of currencies. Simultaneously in the Far East, reserve managers have been buying US dollars to manage the strength of their own currency to help their domestic exporters.
This meant that when the US dollar declined, they had to buy US dollars and then in turn buy Euros to diversify.
Sounds as conflicted as De Niro’s Paul Vitti in “Analyze This” when he wants to shoot his own psychiatrist (Billy Crystal), but he can’t.
Reserve managers bought US dollars and then bought Euros driving the value of the Euro higher as the dollar declined. Now, the inverse is occurring. The US dollar is rising and taking away the need for FE reserve managers to intervene to buy US dollars and subsequently taking away the need to buy Euros. On top of this dynamic, there is the added concern of the Euro as a reserve currency.
This is likely further driving demand away to buy it.
Lastly, we have the European Central Bank announcing it will buy European bonds to stabilize markets, but supposedly will sterilize the interventions.
Since the ECB is apparently going to be opaque on the size of the purchases, I doubt the sterilizations will occur or at the minimum there will be market doubts about them.
