The ugly-bug ball

摘要

Although 2011 was filled with headlines about the potential demise of the single currency, the euro did not actually fare that badly in the foreign-exchange markets. Its trade-weighted decline for the year was only 3.3%. But traders went into 2012 betting on a further fall. Figures from the Commodity Futures Trading Commission showed a record short position in early January. Sure enough, the euro slipped below $1.27 in the year's first trading days, before recovering slightly. Before predicting a collapse in the euro's value, however, it is worth remembering a couple of salient facts. Markets often make sharp moves in the first days of January that are not sustained in the rest of the year. The euro fell by 3-6% against the dollar in early 2011 before stabilising. The presence of so many bearish bets is a classic contrarian signal that all the bad news may be in the price. Secondly, foreign-exchange markets are an "ugly contest" in which traders and investors have to pick the least-worst currency. Most developed countries would like to see their currencies fall in order to help their exporters. Switzerland is trying to cap the level of the franc. Japan has repeatedly intervened to prevent the yen from strengthening too far. America has seen its debt downgraded by Standard & Poor's and runs its fiscal policy via a series of nth-hour compromises.