EUR/USD: 3 Reasons to be Optimistic About the Euro

ForexNewsNow | Published on September 29, 2011 at 10:31 am

ForexNewsNow – The EUR/USD pair started its decline less than a month ago on August 31st (see chart below), however there are still several measures that could be taken that would enable investors to remain optimistic about the future of the EU’s common currency.

The following three points might reassure financial markets, both in the short and long-term, about the overall health of the euro.

  • A Strengthened European Fund

The increase in the amount of financial guarantees for the European Financial Stability Fund (EFSF) – 440 billion euros – may still be inadequate if the institution needs to both help Italy and support banks in the wake of a possible Greek default. Rather than increasing the amount of the financial guarantees from EU member states, one idea would be to increase the fund’s sovereign powers in order to give it more strength to address important euro zone fiscal matters.

According to strategists from The Royal Bank of Scotland, the Crisis Resolution Mechanism (MES), controlling approximately 500 billion euros, is scheduled to begin operating in mid-2013, but may be launched a year in advance. This might be another channel that could help the euro stabilize itself in wake of the sovereign debt crisis.

  • ECB Quantitative Easing

Financial analysts believe that the European Central Bank will launch an ambitious asset purchasing operation in the financial markets, mimicking the US Fed’s QE II model. The ECB could even announce the amount of liquidity it plans to inject into the markets in advance in order to discourage investors from speculative investments on it. On a related note, a reduction of ECB key rates appears more and more likely. Both of these ECB initiatives may help revive the euro.

  • Establishing Eurobonds

The launch of Eurobonds (common financial bonds for euro zone countries) has been firmly rejected by German Chancellor Angela Merkel’s government (more on this topic in this analysis). However, implementing the Eurobonds idea would send a strong message to markets, and would combine European debts, which would be a strong step towards federalism and would perhaps help restore confidence in the euro monetary union as a whole.

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