Friday, December 2, 2011

Euro enters zone of trendless volatility

by John Authers

Financial Times

December 2, 2011

The euro is rather like the dog in the Sherlock Holmes story which did not bark in the night. Why has Europe’s single currency not fallen much further?

Sensible commentators suggest that the euro could pass the point of no return as soon as next week. Even after this week’s resurgence, bond markets are applying pressure that logically leads to the break-up of the euro, with Italian 10-year bond yields still at 6.5 per cent. Several eurozone nations badly need a big devaluation. Yet the euro stays strong.

Judged against the dollar, the euro needs to fall more than 10 per cent just to get back to its low of last summer, even though the risks of a disorderly break-up have intensified sharply since then. At $1.35, it is far stronger than its 1999 inception, when the euro’s founders intended it to trade at parity with the dollar.

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