A "Surreal Disconnect" Among Euro Traders, Strategist Says


Let's see.

Eurozone leaders have yet to agree on an overall resolution to the sovereign debt crisis.

Ireland is demanding lower rates on the loans it's received. Germany is pushing back, andGreece and Portugal are teetering.

Seems like a great time for the euro to.....rise?

In fact, the euro was one of the currencies traders moved into last week as Japan's crisis unfolded, and earlier today it hit a 4 1/2-month high against the dollar. But if you're long euros in search of safety and yield, watch out, says Simon Derrick, BNY Mellon's chief currency strategist.

"The underlying pressures of how investors are reacting are pretty much the same" as last spring, when Greece was bailed out, Derrick said. "We know what that did ultimately to sentiment toward the euro." (Just to refresh your memory, it traded down below 1.20.) "It would seem to take a very brave man to hold euros to get a half or one percent differential of yield," he added.

Derrick's concern is that sooner or later - but it's not clear when - investors will probably refocus on the challenges facing the European leaders, and he believes the consequences for the euro will not be pretty. How not pretty?

"I wouldn't be that surprised, given where we've come from, to have the euro back in the low 1.30s if the situation doesn't come to a compromise in the next few days, " Derrick said. "There does seem to be a surreal disconnect."

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