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Monday, January 7, 2013

When will the Euro weaken?

The Euro has been under huge pressure recently as a result of the debt crisis. Despite this the Euro remains very strong as a currency which often has clients asking me when will the Euro weaken? This is normally in relation to the GBPEUR rate. With the well publicised nature of the debt crisis this is a good question to be asking. After all this time last year the rate was in the 1.20's.. We are now a year later and the debt crisis has only got worse. Why are we still at 1.13-1.15 and not 1.20 or even 1.30? Interest Rates – With the Eurozone offering investors a 1.5% return on their investment in the Euro, the currency is attractive to buy which keeps it strong. The higher a countries interest rate, the more investment it receives, and hence the stronger it grows. The raising of interest rates is a sign to the wider world that the Eurozone economy is expanding and can allow an interest rate hike. Compare this to the UK or USA who have 0.5% and 0-0.25% interest rates respectively. Looking specifically at the GBPEUR rate the sterling side is weak due to low interest rates. You only need to look at the weakness of the pound against most other currencies to understand why it is also weak against the Euro. The prospect of an interest rate hike is again being pushed into 2012 for the UK, and the Federal Reserve have said rates could be on hold until 2013! Can your currency transfer wait a year or even two in the hope things ‘might' improve? Germany – When investors look to the Euro they look at the whole economy and not just individual nations. So the poor state of the PIIGS, whilst a major concern is not the whole story. Despite some worse than expected GDP figures coming out today for Germany, Germany has a very healthy economy with very strong exports. The long term expectations are that this will continue. Contrast this to the UK with a Manufaturing and Industrial sector in decline, and a financial sector tarred by the global financial crisis. Economic and Political Will – There is a massive political and economic will behind the Euro. The backdrop to the current arrangement is a long bloody history and the original idea behind the economic union was to prevent the countries going to war again. To get to where we are today has taken decades of negotiation and concensus which I cannot see being undone quickly. Whilst coming under immense pressure for not acting decisively enough, the Eurozone leaders also have provided the financial back up to deal with the crisis. There are current questions over whether the bailout funds will manage Italy, hence the recent volatility, but the ECB have tools to dampen the volatility. Just last week they bought up €22bn worth of bonds, one of the reasons the GBPEUR rate has come back to 1.13. Today Merkel and Sarkozy are meeting in Paris and this could further help the Euro. Eurobonds – Presently each Eurozone member issues bonds themselves. Bonds are used by governments to finance the day to day running of the country. By auctioning off debt on a promise to pay back in the future, investors provide credit and liquidity to keep the governments functioning. The idea of a Eurobond would be to consolidate the members borrowing, thereby reducing the amount of interest on bonds weaker nations have to pay because they are weak. Germany have said they will not back a Eurobond but only because they feel the indebted nations (PIIGS) don't have their house in order. It is forseeable that Germany would back the Eurobonds if the PIIGS can show themselves to be able to benefit from the Eurobond scheme. I personally cannot see how the weaker nations can manage long term in the current state. I feel the Eurobond is one answer to Europe's problems and if announced down the line will further help the Euro. Despite the huge uncertainty in the market the Euro remains strong. Europe is the UK's biggest trading partner and we have invested heavily in their debt. For better or for worse we are part of Europe. If you believe the Eurozone will collapse, or even hope that it will because you feel suddenly the GBPEUR rate will improve, I would advise caution. The collapse of the Eurozone or further major shocks will hurt the UK economy which is already under huge strain. In my opinion getting the best rate is about setting realistic expectations over your time frame and being ready to pounce when things are favourable. Part of our service is to not only offer award winning exchange rates, but also keep clients informed and updated so that they have all the information to make informed decisions. If you have any currency requirements for the future – even months or years away, I can help offer assistance in making sure you benefit from market movements not suffer. Why take the risk of gambling on exchange rates moving in your favour? We are specialist currency brokers who have won awards for not only our rates, but also customer service. Whether you are an experienced market analyst or don't know your Peso from your Lira, I can help advise all the ins and outs of safely moving money abroad.

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