Euro/dollar is significantly higher, after a convincing and healthy move. There are 5 reasons for this rise, that may not hold for too long.
These levels are the highest level since Ben Bernanke announced Operation Twist, a move that sent the euro as well as most currencies, commodities and stocks plunging. Will this hold?
- Pumped up EFSF: The obvious reason is the hope that European leaders will agree to beef up the bailout fund, known as EFSF. This can be done via leveraging the current allocation and setting its size to between €2 to €3 trillion. Another idea is using the European Investment Bank (EIB) for this purpose. These talks are still vague and they are frequently denied by many leaders across the continent. They also cause discomfort in the German parliament which is set to approve the previous July 21 agreement to beef up the EFSF powers on Thursday. Nevertheless, hope is strong this week.
- Finland giving up: The northern country that demanded collateral in return for providing its share in the next tranche of aid is backing on this demand. They acknowledge that this is unlikely now and warn that their support for future moves should be doubted. The future is in the future, and in the present, they remove a big stone from the path to the next tranche of aid.
- US Weakness: Things on the other side of the Atlantic aren’t rosy. The latest reminder is the US Consumer Confidence that remained weak at 45.4 points, below expectations. The list of weak US figures is very long.
- Short covering: CFTC data has shown that positions were quite extreme in favor of the dollar and against the euro. While a small bias goes hand in hand with the direction of currencies, extreme positions tend to get covered violently. This might be happening now.
- End of month / quarter adjustments: This is why the nature is temporary. Stocks were heavily hit in September and also in August. The dollar strengthened during this period. On the other hand, “safe” bonds from the US, UK, Germany and others gained. Some big funds are committed to certain portions of each asset class in their portfolio. The recent moves might be related to such movements, and can evaporate next week.