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. Last Updated: 07/27/2016

Skeptics Wary of Euro Rebound




LONDON -- The euro has a new spring in its step after Tuesday clearing the key one-for-one rate against the dollar on but it has not yet convinced the foreign exchanges of its vaulting skills.


Traders and investors have been burnt repeatedly by betting the euro had turned the corner only to see it resume a slide that began at the start of its life in January 1999.


While an array of factors are beginning to point to a higher euro, prudence will therefore be the better part of valor, analysts and investors said. "I have been scarred by previous experience and am therefore still somewhat skeptical about this move," said Neal Kimberley, manager of foreign exchange at Bank of Tokyo-Mitsubishi in London.


"We would need to sustain gains above parity for two or three days to change the attitude towards the euro given that so far it has proved unable to sustain higher levels each time it has rebounded."


Tuesday's rally lifted the euro as far as $1.0020, more than 3.5 percent away from life lows it hit three weeks ago. But that was pretty much the extent of the abortive rally which the euro staged in January before slumping back to plumb new lows.


The euro's chances of staging a more protracted rally this time around will be boosted if signs that financial markets are becoming more risk averse are confirmed, said Alfonso Prat-Gay, global head of foreign exchange strategy at J.P. Morgan.


The bank's index of risk appetite is venturing into risk averse territory on a sustained basis for the first time in nearly five months, and not just because of the distortions in swap spreads caused by the U.S. Treasury's debt buyback plans.


"Foreign exchange volatility is picking up and the emerging market spreads rising, all of which is consistent with a falling risk appetite," Prat-Gay said.


"The U.S. markets were closed yesterday [Monday] so we have yet to get confirmation of this, but this could be the key to whether the euro's gains are sustainable."


Jitters about losses on key U.S. stock indices suffered Friday has helped the euro higher against the dollar while the initial impetus for its rally was seen coming from gains it made against the broadly weaker yen.


But relying on other currencies' misfortunes was a poor foundation on which to base euro bullishness, analysts said.


Instead, robust domestic economic fundamentals would need to show the euro zone was narrowing the growth gap with the United States.


The scope for good data to buoy the euro was also seen rising, given that many investors bailed out of long-standing euro positions once the euro broke decisively below parity.


"People are short of the euro at the moment and the best indication of that is bad numbers are no longer moving the euro they way they did a few months ago," said Prat-Gay of J.P. Morgan.


"When good numbers used to come in, no one could care less whereas when we got bad ones, the euro used to get sold off but now the psychology has changed completely."