Currency Impact Report
FX Impact: Nail Biting In The Eurozone
October 01, 2012
A new round of rioting in Greece was the perfect symbol of why U.S. investors got hit by weakness in the euro last week. And, as IndexUniverse ETF Analyst Ugo Egbunike told IndexUniverse.com Managing Editor Olly Ludwig in their weekly chat about the highlights of our “Currency Impact Report,” it wasn’t that the dollar was strong. After all, QE3 has been contributing to dollar softness. Moreover, as individual countries grapple with their constituents, trouble in the eurozone is likely to keep brewing for some time, Egbunike said.
Apart from the eurozone, India stuck out for the second-straight week, as the effects of economic liberalization there pumped up the rupee and encouraged foreign investments in the world's second-most-populated country.
Ludwig: The dollar looked strong against the euro last week.
Egbunike: Considering we’ve had QE3, it’s really more weakness in the foreign currency with respect to the euro. Like we’ve been saying for the past couple of weeks, Europe has made some bold moves with monetary policy. However, it’s the implementation of fiscal policy within the respective eurozone countries that will prove to be much more of a process.
Ludwig: Right—if not elusive, then certainly kind of tortured and elongated?
Egbunike: Yes. You definitely see that. For example, Spain is getting ready to borrow about $270 billion amid rescue plans, and Greece also is due for another round of financing. And this is really where you begin to see the bickering that goes down between eurozone countries regarding the necessary steps that the ECB expects these individual countries to take with austerity measures.
Ludwig: At the risk of suggesting to the world you have a crystal ball, what do you think the longer-term trajectory is? Obviously, the last few weeks haven’t been very good.
Egbunike: The last few weeks weren’t very good, and I think there’s going to be a lot more of this coming into play. The market got overly optimistic when the ECB came out and announced some monetary policies that were fairly bullish for the euro. But the problem isn’t the monetary policies, it’s the implementation of fiscal policy.
Ludwig: What else stuck out for you last week?
Egbunike: One country that is standing out again is India. That’s a story we saw last week and that is that the government there has finally engaged in economic reforms and policies that are really inviting foreign investment to come in and tap into the retail sector of the Indian market. So that’s bringing in a lot of optimism and potential growth at a time when the rest of the market carries a fairly high amount of uncertainty.
Ludwig: Last Friday was the end of the third quarter, so it’s a propitious time to look at the three-month table, which this week is also a third-quarter table. Almost the entire table is a sea of green—it’s flooded with dollar weakness, which is working in favor of U.S. investors.
Egbunike: Right. The story being told here in the past three months is sort of expectations of QE3. So there was an expectation in the market for dollar weakness. But in light of what’s going on now in the eurozone, that might not be the case for the next few months.
Ludwig: I think I’m seeing that in the rolling 12-month table—the dollar strength/euro weakness that has hurt returns for U.S. investors seems to definitely be the case in the past year. So is that telling us that, by and large, the market is still very much in the throes about this doubt with the eurozone?
Egbunike: Absolutely. And the thing here that’s important really for all investors is distinguishing between uncertainty and certainty, and, in this regard, India has made huge strides in separating itself from the pack and has taken some clear steps to attract investor dollars; whereas in Europe, you see nothing but uncertainty.
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