Dollar Sellers - Euro Buyers
James Spurway - Foremost Currency
Group
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September 2007
| It started
as a little domestic problem among low quality mortgage lenders and in
the end developed into a fully-fledged global crisis. The implosion of
the sub-prime mortgage industry prompted investors to worry about asset-backed
securities and about the banks and funds that owned them. From there they
got to worrying about other risks.
They worried about their own situations
because nobody knew where the bodies were buried; there was no easy way
to measure the real value of some of these mortgage assets. Banks quickly
cut back on their lending, hoarding cash in case they needed it to patch
up problems of their own. US mortgage companies went out of business and
Northern Rock had to be bailed out by the Bank of England. The world was
in the grip of a credit crunch.
At the epicentre the Federal Reserve
pumped out liquidity and cut the discount rate. A Federal Funds Rate cut
loomed. The Bank of England abandoned plans to raise Sterling interest
rates. The Dollar fell, the Pound fell and the Euro sailed serenely on.
In mid September it touched its highest level for Dollar (or a record high
if you ignore the Euro's predecessor, the ECU). With the FED rate now being
cut by 0.5%, investors are much less likely to invest in the US Dollar
as the return (yield) is less and therefore the Dollar is weakening. |
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There are a couple reasons for the Euro's
success. When the liquidity shortage first made itself felt the European
Central Bank was quick to shell out cash to the money markets. More important
than that though was the tough talk. The way they told the story in Frankfurt,
the ECB boys had always intended to raise Euro interest rates and they
were not going to be put off their stride by a little thing like a global
liquidity crisis. Investors are always impressed by stuff like that and
they kept faith with the Euro.
Of course it is by no means certain
that Euro interest rates will go up, whatever the ECB Council says. The
market picture changes from day to day and any number of events could divert
the ECB from its current strategy. Until then, however, the prospect of
a Euro rate hike will tend to give the Euro an advantage over the Dollar,
especially as it is all but certain that the US economy will soon feel
the negative effects of the sub-prime-related fallout. It means that the
weak Dollar game is still playing. Most analysts were looking for the Euro
to reach $1.40 but on September 21st we saw it hit an all time high of
$1.4120 and after a round of consolidation up there they expect it to move
higher still. For Americans buying into European real estate this is a
concern because it pushes up the Dollar cost of investments.
The cautious investor will want to
do something to protect against this and the solution is to buy the Euros
'forward'. Instead of waiting for completion day to arrive and taking pot
luck with the exchange rate it is possible to fix a price today, even when
there are still months to go before you will actually need the money. Pay
a percentage deposit, agree an exchange rate and set a day for the transaction
to settle. After that there is nothing to do until settlement day arrives.
At that point the balance of the Dollars are handed over and the Euros
go to your account.
A forward purchase of Euros sorts
out your exchange rate risk without crippling your cash flow in the meantime.
It's worth a look. Don't be dismayed if your regular bank has no idea what
you are asking them for. Go to a currency specialist firm. They handle
trades like this all the time and you'll find people there that know what
they are talking about.
 James
Spurway is a foreign exchange consultant with The Foremost Currency Group
Ltd helping both private individuals and corporate clients to simplify
their foreign currency requirements and to achieve improved exchange rates
through market insight. For further information please contact +44 (0)1442
875777 or visit the website ww.foremostcurrencygroup.co.uk. |
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