A lot is being written about the end-of-the-euro as we know it at the moment - not surprising with the problems persisting both inside the Euro area and on the periphery e.g. Hungary with huge private sector (read mortgages) Euro and CHF borrowing.
Earlier in the crisis there was a big diversification out of the dollar as it got weaker - US investors started investing heavily abroad, international companies (and even sovereign countries) started asking for payment in Euros as opposed to dollars.
This seems to be reversed, with Iran converting €45 bill of their FX reserves from Euros to US$ and gold and probably a fair bit of repatriation by US investors who suddenly find their non-US$ assets not performing in US$ terms. A US investor who held the IBEX is down 40% YTD is US$ terms!
All this has led to to the Euro sliding against the dollar for six months in a row, seven would be a bit of a record (it’s would be record in the dollar index of which the Euro is a large component), but what would really set the ball rolling (not that the recent sell-off is insignificant) would be if domestic Euro area investors started losing faith in the Euro and started exporting capital en-masse.
What would make this a reality? Well, the recent bail-out package combined with the deteriorating value of the Euro is powerful stuff in particular for the German electorate and savers. But there are ‘savers’ in all countries the question is only when they will get sufficiently nervous and start piling their (Euro)savings into other currencies/assets. Some have without doubt already done that - the SNB’s FX reserves grew by CHF80 bill last month and €/CHF have made new all time lows today.
Gold made a swift recovery yesterday and again has made all time highs against a lot of currencies while just touching the highs in US$ terms.
Frankfurt saw the first gold vending machine last year and while I’ve been skeptical of gold as everyone seems to be long already, there is perhaps room for it to move much higher if we are indeed talking about a dismantling of the Euro from the inside.......watch this space!
