By Matthew Brown and Oliver Biggadike
Nov. 9 (Bloomberg) -- A decade after the euro replaced the deutsche mark, Germany’s export-driven recovery is undermining European Central Bank President Jean-Claude Trichet’s efforts to slow the currency’s record rise.
Speculators are the most bullish in almost two years on the euro, betting the eight-month, 20 percent rally won’t stop until it hurts the continent’s biggest economy. Even as Spain, France and Portugal advocate weakening the euro to lower the price of their products overseas, 32 of 47 strategists surveyed by Bloomberg forecast an increase from last week’s $1.4847 close by Dec. 31 or March 31. It rose 0.5 percent to trade at $1.4921 as of 12:56 p.m. in Tokyo.
Intended to unify, the euro is proving divisive as Europe battles recession. Germany, the world’s largest goods exporter in 2008, is leading the rebound, deflating pressure to depreciate the currency. Trichet has argued for a strong dollar repeatedly, calling it “extremely important” Oct. 15. A day later, Germany’s then-Economy Minister Karl-Theodor zu Guttenberg said “there is no reason for concern” because his country’s competitiveness “does not depend on the dollar rate” versus the euro.
“Global growth has helped Germany’s exports and made it less sensitive to the exchange rate,” said Bilal Hafeez, chief currency strategist at Frankfurt-based Deutsche Bank AG, the largest currency trader and Germany’s biggest bank. “They won’t get worried about the euro’s strength until at least $1.55.”
Bullish Speculators
Euro options-trading indicates about a 60 percent chance it will reach $1.55, a 4 percent gain, by March 31, implied volatility data tracked by Bloomberg show. Hedge fund managers and other large speculators had more than twice as many futures and options bets in September and October that the currency would rise as wagers on a decline, the most bullish ratio since November 2007, Commodity Futures Trading Commission data show.
Germany is recovering faster than other euro countries from the worst global downturn since the 1940s. Its economy expanded 0.3 percent in the second quarter, after contracting the previous four. The euro zone shrank 0.2 percent in April, May and June. Deutsche Bank predicts Germany’s exports will rise almost 6 percent in 2010, compared with the region’s 4.4 percent.
An index measuring German executives’ optimism hit a 17- month high of 96.8 in October, the Munich-based Ifo institute’s business climate survey showed. Manufacturing orders increased an unprecedented 19 percent in the seven months to Sept. 30, according to the German central bank.
Spain’s Pain
Mercedes-Benz maker Daimler AG in Stuttgart reported its first quarterly profit in a year on Oct. 27, and the shares are up 84 percent since March 1. Ludwigshafen-based BASF SE, the world’s largest chemical company, earned profits for three straight quarters, including 237 million euros ($352 million) in the third, when 46 percent of its revenue came from outside Europe. Competitors struggled, with Arkema SA in Colombes, France, posting losses for the past three quarters.
Exports accounted for 40 percent of Germany’s economy in the second quarter, compared with 35 percent for the euro region. France and Spain sell a combined 15 percent of Europe’s cross- border shipments of what the Paris-based CEPII Institute considers “high quality” goods.
Germany’s share is almost a third. They include Porsche SE’s 911 Carrera sports cars, which are manufactured in Zuffenhausen and sell for at least $77,800 in the U.S.; Wuerzburg-based Koenig & Bauer AG’s printing presses, which produce 90 percent of the world’s cash; and optical lenses from Carl Zeiss AG, which began making microscopes in Jena in 1847 and is now based in Oberkochen.
Mercedes Sales
Daimler, the world’s second-largest maker of luxury vehicles behind Munich-based Bayerische Motoren Werke AG, said U.S. Mercedes-Benz sales jumped 21 percent in October.
“Germany has shown the capacity to compete probably more effectively at these kind of exchange rates than many other European countries,” said Alan Ruskin, head of international North American currency strategy at RBS Securities Inc. in Stamford, Connecticut.
Spain contracted 1.1 percent in the second quarter, and Deutsche Bank sees its exports trailing Germany’s with a 2.4 percent increase in 2010. Spain’s economy was once an engine of growth, expanding 3.9 percent a year on average in the decade to June 2007, compared with the region’s 2.3 percent.
While France’s gross domestic product grew as much as Germany’s in the three months through June, its exports will lag behind, with 3.8 percent growth next year, Deutsche Bank estimates. After Portugal’s economy rose 0.3 percent in the second quarter, exports slumped in August by 32 percent.
Unprecedented Fall
The euro’s rally followed a record 23 percent, seven-month drop to $1.2330 on Oct. 28, 2008, from $1.6038, the all-time record, in April 2008. It rose to $1.50 on Oct. 21, as investors dumped U.S. assets on signs of a global recovery and central banks diversified away from the greenback.
Euros account for 28 percent of the world’s $4.3 trillion in currency reserves, versus the dollar’s 63 percent, the slimmest margin ever, International Monetary Fund data show.
Meudon, France-based Gemalto NV, the world’s largest maker of smartcards for data storage and financial transactions, reported third-quarter sales on Oct. 22 that fell short of analysts’ estimates, leading to the stock’s worst day in almost two years.
“Weighing on our margin is this adverse currency effect simply because the euro has strengthened quite a bit,” Gemalto Chief Executive Officer Olivier Piou said as the company posted second-quarter earnings on Aug. 25, when the euro was at $1.43. “Year-on-year gross margin was down 3 percentage points,” in part due to the euro’s advance, he said.
Sarkozy’s ‘Disaster’
Service Point Solutions SA in Barcelona, Spain’s only publicly-traded document manager, may post its biggest loss since 2002 in the third quarter, partly because of the stronger currency, analysts’ estimates show.
“About 30 percent of our sales are in the U.K., so our sales are lower,” Chief Financial Officer Matteo Buzzi said in a Nov. 6 interview. The euro was up as much as 12 percent against the pound last month from June’s six-month low.
Henri Guaino, an aide to French President Nicolas Sarkozy, called the euro at $1.50 a “disaster” on Oct. 20, the day before it hit that level for the first time in 14 months. Portuguese Finance Minister Fernando Teixeira dos Santos said in an Oct. 1 interview that he looks with “concern” at its impact on his country’s exports, which fell to a four-year low in August.
Trichet Rhetoric
Trichet said on Nov. 5 that ECB officials “appreciate” U.S. statements supporting a “strong dollar,” a phrase he uttered at least seven other times in the previous five weeks. “I echo this statement as something which is important in the present circumstances,” he said at a Frankfurt press conference. Ivan Sramko, an ECB governing council member, was more direct on Oct. 23, saying the euro rally may cause economic “problems.”
European Monetary Affairs Commissioner Joaquin Almunia, French Finance Minister Christine Lagarde and Spanish Finance and Economy Minister Elena Salgado also have complained about the euro’s strength in the past two months.
Some members of German Chancellor Angela Merkel’s ruling coalition cheer the rise of the euro, which was pegged to a basket of currencies dominated by the deutsche mark when it was created Jan. 1, 1999.
“Sure, the euro’s comparative strength is an irritation for our exporters, but that’s a short-term nuisance,” said Frank Schaeffler, a Free Democratic Party member on parliament’s Finance Committee, in a Nov. 5 interview. “We want a strong euro. The longer-term well-being of the economy depends on it.”
Euro Pride
Investors say intervention to weaken the euro is unlikely at current levels, given the dominance of Germany, which accounted for 27 percent of the zone’s third quarter GDP.
“The German government always believed in a strong- currency policy,” said Werner Eppacher, who oversees $15 billion a year in trades as head of foreign-exchange at DWS Investment GmbH in Frankfurt and predicts the euro will hit $1.52 by May. “They believed it’s something to be proud of, that a strong currency means reliable fiscal policy, strong economic structure. They viewed it as a sign that they are doing their job correctly.”
Last month, Merkel dismissed critics of Germany’s reliance on sales abroad. “All those who now say we’ve depended too much on exports are undermining our biggest source of prosperity and must be rebuffed,” she said on Oct. 14.
Reduced Chance
The last time policy makers intervened to influence the euro was after the currency had fallen 27 percent since its inception. Central banks bought about 6 billion euros on Sept. 22, 2000, pushing it to 90 U.S. cents from 85 cents in a few hours. It bottomed a month later at 83 cents and hasn’t traded below $1.10 since 1993.
An index of the euro’s value, momentum and trading trends last week signaled a 29 percent chance of another intervention, down from 55 percent in January, said Stephen Hull, Morgan Stanley’s global head of currency strategy in London.
“It’s always a combination of levels and speed,” said Thomas Stolper, an economist in London at Goldman Sachs Group Inc., the most profitable securities firm. “A gradual drift higher from here to the old highs would not necessarily trigger an intervention, but if we went to $1.60 in a few weeks, the probability would be substantially higher.”
Rising debt loads for the region’s countries may cause the euro to depreciate once growth takes hold, said Otmar Issing, the ECB’s former chief economist. The zone’s budget deficit will swell to a record 6.9 percent of GDP next year, from 6.4 percent in 2009, with all 16 countries breaching European Monetary Union limits as they pump cash into their economies, the European Commission forecast Nov. 3. Spain, Greece and Ireland will have shortfalls of 10 percent or more this year and next, it said.
‘Big Problem’
“The reasons for running deficits at the moment, to fight the crisis, are accepted, but when it ends it will be a big, big problem for the stability of the currency,” Issing said in an Oct. 26 debate at the London School of Economics.
For now, that isn’t a problem. Interest rates of 1 percent in Europe versus near zero in the U.S. have attracted investors to the euro. The American government has flooded the world with dollars by spending, committing, lending or guaranteeing $11.6 trillion to fight the recession while the ECB has been more restrained on measures that would debase its currency.
“The Fed and the government filled the market with dollars, making it the main currency for carry trades,” where low- interest economies’ money is invested in higher-yielding ones, said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. “This will only end when the Fed starts tightening monetary policy or the market believes a hike is imminent.” He sees the euro rising to $1.53.
‘Upward Pressure’
The International Monetary Fund on Nov. 7 said “there are indications” that traders are using the dollar to fund carry trades across the world and that it may still be overvalued even after its slide this year.
“These trades may be contributing to upward pressure on the euro,” the IMF said in a report.
Investors outside developed Europe bought $6.5 billion of its government and corporate bonds from April 1 to Nov. 4, the fastest pace since March, according to Cameron Brandt, an analyst at fund-flow data provider EPFR Global in Boston. European stock purchases by foreigners totaled $5.8 billion from mid-July to November, the most since at least 1999, Brandt said. The Dow Jones Stoxx 600 Index of Europe’s shares is up 53 percent since March 9 after a record six-month rally. Germany’s DAX index is up 49 percent.
The euro’s “pain threshold is associated with new record highs, so we would need to go above $1.60,” Goldman Sachs’ Stolper said. “Demand for German goods depends a lot more on global growth and investment patterns than on the strength of the euro.”
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Oliver Biggadike in New York at obiggadike@bloomberg.net
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