x Abu Dhabi, UAEMonday 22 January 2018

Markets on euro death watch

Experts say the euro is living on borrowed time and its collapse could trigger a global financial earthquake.

Despite all the bad news in the currency market, the euro has remained relatively stable, a phenomenon that perplexes investors and analysts. Kacper Pempel / Reuters
Despite all the bad news in the currency market, the euro has remained relatively stable, a phenomenon that perplexes investors and analysts. Kacper Pempel / Reuters

Experts say the currency is living on borrowed time and no one is sure how the bills will be paid after its funeral.Harvey Jones reports

It isn't often you witness a major currency going into meltdown. But it's happening now, on a grand, multi-country scale.

The collapse of the euro could trigger a global financial earthquake. Its tremors and aftershocks will be felt in every corner of the world, from the US to China to the UAE.

It will also have massive implications for expats in the UAE, especially those who are paid in US dollars but regularly have to shift money to their home currency.

EU politicians seem incapable of saving the single currency. So what can you do to save yourself?

Most people don't worry too much about currency movements until they live and work abroad. Being paid in one currency and having financial interests in another certainly focuses the mind.

If you are looking to transfer a large sum, a shift of just a few foreign exchange (FX) points can become a matter of dramatic interest.

The wrong movement at the wrong time could easily cost you thousands of dollars.

This wasn't such a big problem before the financial crisis, when currencies were relatively stable and sharp movements pretty rare.

The credit crunch changed that. Some currencies plunged, notably the British pound. Others have remained inexplicably strong, notably the euro. The world's reserve currency, the US dollar, has been frustratingly weak.

If you are looking to send money overseas, you will be watching the antics of EU politicians and crossing your fingers for a dollar rebound, not just against the euro but other currencies. But are you likely to get it?

The most astonishing thing about the latest leg of the financial crisis is that the euro has continued to stand bafflingly firm.

In January, the euro hit a low of US$1.31 (Dh4.81), but steadily rose to $1.47 in May, even as the single currency crisis worsened. It has recently dipped to below $1.40, but this is far from the all-out rout you might have expected.

If street riots in Greece and Silvio Berlusconi's Bunga Bunga parties haven't torpedoed the euro for good, what exactly can sink it?

A lot of investors and analysts have been scratching their heads over the continuing strength of the euro, says Chris Towner, the director of FX Services at HIFX, a currency transfer service. "The simple answer is that it has remained strong on the back of hopes that EU leaders will find a concrete solution to the sovereign debt crisis."

Those hopes are fading fast, but another factor keeps it strong. Germany. With Europe's solid-headed export powerhouse backstopping the single currency, surely it can't fail?

The European Central Bank (ECB) has played its part in propping up the euro. Unlike the US Federal Reserve and Bank of England, it has remained unfashionably attached to the principle of sound money, shunning the lures of quantitative easing (QE) and keeping interest rates relatively high.

You can probably thank the Germans for that as well.

As the latest euro zone bailout unravels and Italy's debt spirals out of control, it looks like the single currency may finally be facing its Waterloo.

Only two things can save the euro and neither of them appears feasible, Mr Towner says. "The first is full fiscal integration, but this can accurately be described as impossible in the current conditions," he says. "The other is to have the ECB print vast sums of money under QE. This is also something of a non-option, however, as it is illegal under the EU constitution."

Another massive obstacle stands in the way. "Germany still shudders at the memory of hyperinflation under the Weimar Republic and would reject any move to force it to pay the debts of its poorer southern neighbours."

Germany has given the euro its strength, but, paradoxically, it may destroy it. "One thing seems certain, the death of the euro as we know it is only a matter now of when, not if," Mr Towner says.

By the time you read this, it might even be dead. If so, apologies. Events move fast these days.

Anybody thinking of shifting their US dollars into euros will be avidly watching the euro zone tragicomedy.

They might also consider that events are moving in their favour and time is on their side. The crisis can surely only worsen, so if you're patient, you might find an even better time to make that currency transfer.

Yet a revival in the US dollar is far from guaranteed.

As the world's reserve currency, its fate partly depends on investors' attitude to risk, says Chris Canning, the head of private desk at First Rate FX, a currency service. "When the global economy is in trouble, investors buy into the US dollar because they see it as a safe haven," Mr Canning says. "When things improve, they shift into riskier currencies in the hope of getting a better return."

This makes dollar movements volatile and difficult to call. Its fate doesn't depend as much on the state of the US economy than the strength of everybody else's economy.

The dollar may have gained ground against the euro, but it isn't a very impressive comeback. "The prospects for the US dollar still don't look good," says Gaurav Kashyap, the head of the DGCX desk at the Dubai-based Alpari ME DMCC, an online trading brokerage.

The US has posted some impressive growth figures recently, but this may actually harm the greenback. "Wall Street has enjoyed a very good earnings season and economic data suggests that conditions will continue to improve," he says. "If we continue to see good jobs growth, we can expect to see the US dollar struggle further."

Have you got that? A US recovery will spark a slide in the dollar because it suggests the global economy is on the mend and investors can, therefore, take a chance on riskier assets. No wonder so many expats find it so tricky to time their currency transactions.

QE3 is another wild card. If the Federal Reserve decides to kickstart the US economy by embarking on another round of virtual money printing, the dollar could go all wimpy again.

Even if it does beef up against the euro, that doesn't mean it will hang tough against the British pound or other favoured expat currencies, such as the Australian dollar.

In January 2009, $1 hit a high against the Australian dollar at $1.56, a rate that must look like ancient history to Australian expats. Today, the two currencies are at parity. If you're an Australian looking to send your US dollar earnings back home from the UAE, that's got to hurt.

The US dollar has rallied slightly against the Australian dollar, but don't expect it to last, Mr Kashyap warns. "Economic data from Down Under remains pretty solid and we expect to see the Aussie dollar make another move towards those all-time highs," he says.

If China continues to grow strongly, that will also help bolster the Australian dollar because of increasingly close trade relations between the two countries, he says.

The US dollar is set to cause further agony among expats by remaining relatively weak against the New Zealand and Canadian dollars, Mr Kashyap says. "The Aussie, Kiwi and Loonie are all commodities currencies and will, therefore, find support from higher commodity prices."

Ironically, the best hope for those wanting to see their US dollars go further is for euro zone contagion to drive investors back to the world's safe-haven currency, says David Kerns, a private client dealing manager at Moneycorp. "A slowdown in Asia could also help those sending money back home, but I really can't see that happening in the short term."

But what if the US dollar loses its role as the world's reserve currency? Some claim the Chinese yuan is poised to take its place, but Mr Kerns can't see this happening any time soon. "The yuan is still pegged against the dollar and it isn't traded outside China, which seriously limits its global use. Until that changes, the US dollar will remain the world's first-choice currency in times of global distress."

This means that bad news for the global economy is good news for dollar-rich workers in the UAE. Every time global sentiment improves, your dollars will weaken.

Given the bad news coming from the euro zone, sentiment could be shifting in your favour.

If you're looking to send currency back to your home country, exchange rates can become an obsession. You might find yourself checking those online FX sites several times a day, looking for the perfect moment to place your trade.

Mr Kerns says that trying to accurately time today's currency madness is impossible. "If you have to make regular payments overseas, your best option is to lock into a favourable rate through a currency specialist. They can also offer advice on the best time to make transfers abroad," he says.

Nobody knows how the euro zone tragedy will play itself out. Greece and Italy could peel off, swiftly followed by Portugal and the rest of the Club Med strugglers.

It could be reduced to a rump of Germany, the Netherlands, Austria and Finland. Or maybe Germany will return to the deutschmark.

Or perhaps it will be saved after all, by a very un-Germanic blast of interest-rate slashing and money printing.

Right now, absolutely anything could happen. So keep watching those FX sites. If you spot an attractive rate, you might want to lock into it. That will allow you to make regular transfers home for up to 12 or 24 months at a fixed rate, without having to worry about the next move in currency markets.

The rest of us will keep on watching to see how currency rates are affected by the latest euro zone plot twist.