Currency Impact Report
FX Impact: Euro Drops As Doubts Re-emerge
September 24, 2012
While the European Central Bank said all the right things earlier this month about defending the euro, it’s always possible the tortured political process in the eurozone could send the region right back into serious crisis. And that’s precisely what investors worried about in the past week.
IndexUniverse ETF Analyst Ugo Egbunike emphasized this in his weekly chat with IndexUniverse.com Managing Editor Olly Ludwig, saying that our weekly “Currency Impact Report” showed a clear weakening of the euro against the dollar in connection with such concerns. How it all plays out will only become clear over time, Egbunike said.
Ludwig: So what stood out in the past week?
Egbunike: We saw a reversal of what we saw in the previous week, with hugely negative gains for U.S. investors relative to local investors in Europe, and we saw a strong move in the euro.
Ludwig: When we talk about the “race to debase” among central banks, help me see the euro weakening through that lens.
Egbunike: It’ll take some time before we see all the expected devaluation in these currencies. But for right now, even though it was a great move by the ECB in making it known that it was ready to stand by to protect eurozone countries, there remain all the fiscal policies necessary for this to be successful. So now we see Italy and Spain and Greece coming up for new rounds of bailouts. In the case of Greece, I believe they’ve only agreed to $9 billion of $11.5 billion in required cuts to meet their bailout.
Ludwig: So fiscal policy is where the rubber meets the road in terms of truly working out details of this crisis?
Ludwig: How about India and the rupee?
Egbunike: With India, the rupee kind of popped this week, and that brought some pretty positive returns for U.S. investors—about 1.7 percentage points in positive returns for a total return in the course of the week of almost 3.9 percent, compared with local Indian investors who only got 2.1 percent in returns.
And that was based, in part, on an announcement of a steep hike in diesel prices, and also permission for foreign investment to come into the retail sector.
Ludwig: That was the Walmart news, yes?
Egbunike: Yes. However, I think there is some worry about the rupee that there may be some push-back on reforms that were previously announced. It would be rollbacks of things like diesel-price reform and the liberalization of the retail sector that helped the rupee in the past week.
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