Euro update 2013

December and early January were generally kind to the euro. The first two weeks of January were particularly so, despite getting off to an uncomfortable start as a result of distractions in Washington. Negotiations to avoid the “fiscal cliff” went right to the wire, only delivering an agreement in Congress at the thirteenth hour on New Year’s Day, and a half-baked one at that. It resulted in a brief rally for the euro against the dollar that was quickly reversed.

The real euro rally began the following week. A series of events worked in its favour. The European Stability Mechanism (ESM) rescue fund launched its first round of short-term bonds to eager investors, who accepted a negative yield of 0.0324% to buy the paper. Ireland and Spain also held successful auctions of government bonds. European Central Bank President Mario Draghi encapsulated the improvement in sentiment at his press conference when he talked of the “positive contagion” that was helping to deflate the peripheral debt crisis.

Sterling and the dollar both fell by half a cent in the first two weeks of January. The UK economic data did the pound no favours, with manufacturing and industrial production both falling in November. That particular news sparked a sterling sell-off that took it to its lowest level in nine months against the euro. Investors are not overjoyed at the anti-EU sentiment being expressed by parliamentarians. Nor are they optimistic about the prospects for Britain’s AAA credit ratings.

“Renewed confidence” rallies for the euro have been ten a penny during the last couple of years. Until now, each one has preceded a new development in the peripheral debt crisis. The latest one, however, has more of a feeling of durability about it. If Sig. Draghi’s idea of “positive contagion” takes hold it could be good year for the euro.