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<\/p>\nToday’s bout of optimism notwithstanding, Morgan Stanley (MS) remains very bearish on the euro, forecasting big declines to come.<\/p>\n
Here’s Stephen Hull<\/p>\n
We have made some changes to our currency forecasts,
expecting the dollar to strengthen further in 2010. Having
reached our 1.24 target in EUR\/USD, we now expect a
decline to 1.16 by year-end and for the euro to trade at a
discount to fair value (1.17) in early 2011, reaching a trough
around 1.12 before recovering later in the year.<\/p>\n
Why?<\/p>\n
The shift from the initial fiscal problem in the
periphery (Greece) has now become a fiscal problem for core
Europe; more importantly for the euro, it has also undermined
the credibility of the ECB. The ECB’s priority has not been to
focus on the euro as a store of value but has shifted to
helping stabilize the situation. Its role as lender of last resort
has been fully tested and arguably its independence
undermined now that it is buying government bonds to help
ease Europe’s debt problem. There is little doubt in our minds
now that through this crisis there is growing evidence that the
euro is no longer a hard currency like the deutschemark but
something softer. If this is true then those that hold euros
might be less willing to hold them and, as Exhibit 5 shows,
investors – especially central banks and equity investors –
have bought significant amounts of euros since its inception in
1999.<\/p>\n
<\/p>\n
Separately, Morgan Stanley’s Joachim Fils writes:<\/p>\n
To be clear, we neither advocate a EUR break-up nor is this
our main scenario. However, the risk that it happens is far
from negligible and the consequences for financial markets
would be severe. Given recent developments, a break-up
scenario has clearly become more likely, for two reasons. <\/p>\n
First, the lesson for other euro area members from the Greek
bail-out package is that no matter how badly you violate the
SGP guidelines, financial help will be forthcoming, if push
comes to shove. This introduces a serious moral hazard
problem into the European equation. Fiscal slippage in other
countries has now become more rather than less likely in our
view.<\/p>\n
Second, the ECB’s climb-down on its collateral rules
regarding lower-rated bonds, which ensures that Greek
government bonds will still be eligible as collateral in ECB
tenders beyond 2010, adds to this moral hazard problem and
confirms that the ECB is not immune to political
considerations and pressures. <\/p>\n
<\/p>\n