11/20/2010

Risk-On, Risk-Off Might be Over for Euro-Dollar

It might be time for some currencies to go their own way.

The risk-on, risk-off paradigm in which currencies with similar yields tend to advance or retreat en masse shows signs of weakening as the global recovery lurches forward at divergent speeds.

The break in typical risk-on, risk-off trading could become more common as China and the economies closely tied to it continue to march ahead, while the U.S. is weighed down by questions over its own growth and the Federal Reserve's dollar-diluting easing program.

Meanwhile, the specter of a default within the stressed euro-zone periphery keeps the euro vulnerable to swings up and down based on headlines coming out of the fiscally troubled region.

"The euro-zone sovereign-debt problem is going to be around for years," said Robert Lynch, currency strategist at HSBC in New York, and the effects of Fed's asset-purchase program still are yet to be fully played out, he said.

Looking at the euro-dollar pair, then, might not be the best way to take the temperature of general market sentiment, or willingness to take risk.

"The very different backdrop in Europe and the U.S.," compared with the full-speed ahead growth in emerging markets, means that the even though the euro might average around $1.35 over the next few months, "you could have significant swings around that depending on when the market's attention is focused on deficiencies in the euro zone, or [when it's on] the difficult backdrop in the United States."

Read more at The Wall Street Journal

Nov 20, 2010 2:09:58 PM | Current Affairs, Economy

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