Warning Signs Mounting for the Euro: Strategist


The euro has been a Teflon currency lately, but this strategist says concerns are building.

Wondering why the euro is hanging tough? Marc Chandler, chief currency strategist at Brown Brothers Harriman, has been following several worrisome developments in the euro zone, and he is asking the same question.

For starters, Chandler says, a little noticed decision by the European Central Bank to allow member central banks to not accept as collateral bonds that are guaranteed by countries that are receiving aid from international organizations like the IMF. "This may not seem to be significant at the moment, but if there is a new flare-up of tensions, this could compound the challenge of the distressed countries' banks," he wrote in a note to clients.

Chandler is also concerned that banks may be asked to put up more collateral when borrowing from the European Central Bank, and that could have the effect of making unsecured funding more costly.

Country-level problems are another worry. Chandler says unpaid bills are a growing problem for Spain, and bank deposits are shrinking in Greece, Ireland, Spain and Italy. Portugal isn't facing those problems, he says, but it is experiencing "significant fiscal deterioration," with tax revenue falling and social security expenses rising.

All in all, Chandler says, these concerns "make us suspicious about the euro's ability to sustain the upside break" above $1.33.

Be careful out there.



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