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Wednesday, May 9, 2012

What's behind the Euro's levitation ?

With the debt-crisis laying waste to economies and roiling politics in Eurozone states beyond the PIIGS-- in France, England, and Germany as well--why is it the Euro itself hasn't tanked ? Michael Casey of Marketwatch explains, in his article, 'Odd bedfellows behind the euro’s resilience', excerpted below.

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Central-bank policies explain why buyers frequently emerged whenever the euro dipped below $1.30 in February, March and April. And they’re preventing it from collapsing more rapidly now that it has finally broken below that level and has reached its weakest point since Jan. 25.

With its 1.0% refinancing rate, the ECB [European Central Bank] stands apart from its main counterparts--the U.S. Federal Reserve, the Bank of Japan, the Bank of England and the Swiss National Bank--whose benchmark rates range from zero to 0.5%. What is more, these central banks have all adopted aggressive supplemental measures that the ECB has resisted: “quantitative easing” bond-buying on the part of the Fed, BOE [Bank of England] and the BOJ [Bank of Japan] ; a floor rate for the euro/Swiss franc exchange rate on the part of the SNB [Swiss National Bank]. By default, this creates what is known as “positive carry” for the euro.

This structural problem means the ECB’s monetary stance can’t singlehandedly prevent the euro from falling, which is why it depends on a helping hand--though it isn’t necessarily a welcome one--from China’s central bank and sovereign-wealth funds.

It is widely known that the PBOC [People's Bank of China] is diversifying its $3.1 trillion stockpile of foreign-currency reserves out of dollar assets, a move that includes buying the euro. Yet from all accounts, China’s interest in the European currency reflects something more than a simple portfolio reallocation. Evidence suggests that Chinese state institutions are effectively intervening to manipulate the euro exchange rate, perhaps to offset the competitiveness that the country’s exporters have lost to the dollar now that the yuan has appreciated. Over the previous three months, traders referred so frequently to buy orders by a “large Asian central bank” that it became conventional wisdom that China was deliberately stopping the currency from falling below $1.30.
In reality, it plays out in a more-complicated way than that, with the mere expectation of Chinese buying encouraging self-fulfilling actions by other market participants.

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