欧元将走向何方?

Doctor Dolittle’s pushmi-pullyu is a sort of animal the European Union Committee might create-a cross between a gazelle, a chamois and a unicorn with a head at each end. But the unfortunate creature, the euro, is now finding itself pulled in two directions at once. The prospect of higher rates calls for the currency to strengthen, while the worsening state of the periphery countries, calls for it to weaken.

On this chart, you can see the push bit that deterring holders of the euro. Here in blue, we’ve got the extra yield that investors need to buy Greek bonds spread at the Greek treasury over safe German bonds. Against that got the euro’s exchange rate with the dollar. The euro on here is upside down. So the correlation between the two can be seen more clearly. Rising problems in the euro zone’s troubled countries, represented here by Greece, mean a falling euro and vice versa. Right now, the problems in euro’s periphery are rising, the litany of dismal record said. Greek three-year bond yields passed the level will hit amidst panic for the first time today as investors bet that Greece will have to restructure them some point soon. Irish two-year yields were briefly above 8% for the first time. Longer-dated Portuguese yields hit their highest ever. Even Italian bonds were at their highest yields also their lowest values since 2008--the 10-year yield briefly passing 5%.

The most interesting part of this chart is here, where the euro seems to have broken away from all those troubles. Euro is strengthened, that is the line moved down for the past three weeks, despite the worsening situation in the weakest countries.

Rising rates will make time even tougher for the periphery. But they help to attract money to the euro zone, particularly from the US, where there is no sign that the Federal Reserve will raise rates any time soon. Here you can see the euro-dollar exchange rate measured against the additional interest that can be earned from two-year government bonds rather than two-year US Treasury bonds. The euro, the right way up this time, you can see that it lifts pretty closely with the amount of extra interest available from buying core euro zone bonds. Of course, the core euro zone bonds, Germany, are heavily influenced by the ECB’s interest rate.

The exchange rate and the extra interest diverge again about three weeks ago here, just as what the Greek link to the euro’s value. The reason is that the pushmi of the periphery is meeting the pullyu of interest rates. Rates have been waning recently, pulling the euro up and you can see hold has gone up, but not nearly as far as you’d otherwise expect for what’s going on with the additional German yield.

Now on Friday, we get the start of the next round of European diplomacy just designed to quell concerns over the periphery. As the politicians continue to bluster,the renewed focus on Greece, Ireland and Portugal could well see the euro push down again.