Factors which are causing Euro to be so strong against Sterling

It isn't quite so simple; British manufacturing (OK don't laugh.........there is a shard left!) benefits; the retail sector benefits (London is currently choka with Americans, Europeans and Russians getting more bangs for sterling bought with their dollars/euros/roubles.

There are still the questions - is it a feasible idea that sterling, as a major world currency, could simply disappear, and if so what happens to the 70+ million UK citizens who get paid/pay bills in sterling? Could the Zimbabwean situation occur in the UK or Europe?

The other conundrum is the myth that Brown's alleged 'mismanagement' of the UK economy is causing sterling to go down down but that throws no light on why - specifically - euro is rising (given recession and unemployment conditions in Euroland), and the dollar skew-ways relative to sterling. Other political leaders appear to be closely imitating UK strategies to shore up individual institutions and weather this unprecedented storm which an economist friend tells me 'has changed everything'.

As Demoivre has commented, sterling is not now pegged, as formerly, and is free to float and adjust against other currencies. What I still don't understand is why/how - since the same pressures are bearing on the Euro - it is strengthening. Also - as has been commented - since sterling is now 'cheap' isn't the next phase new purchasers who will drive the price up again?
 
It was mentioned on the news last night that this a deliberate policy to make sterling weak. The euro rate is at 2.5% and therefore strong and much more attractive to invest in.
Will the ECB had to reduce rates close to what the UK and USA have done to counteract this?
Just wondering if we could be in for a period where the main central banks are forced to compete with each other to keep their rates as low as possible.
 
"Fair enough, but if short-sellers temporarily depress the value of an asset below it's 'fair' value then they will get burned when it is bought up on the other side of the dip. If you believe in efficient market theory, then an undervalued asset will always find a buyer and the price will return to value. So short-sellers would be toasted if they tried to depress the price of an asset that wasn't fundamentally over-valued."

I have a soft spot for George Soros, for no reason other than that I once had to make a delivery of papers to his apartment (I once worked in a very swanky 5th Avenue law firm in NY, as the office runner and general dogsbody - my life has been at times a bit like Zelig, except without actually influencing anything).

Anyway, I tend to side with Demoivre on this argument. Interestingly, so does George Soros, from whom I quote below:

"I must state at the outset that I am in fundamental disagreement with the prevailing wisdom. The generally accepted theory is that financial markets tend towards equilibrium, and on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly because they do not merely discount the future; they help to shape it. In certain circumstances, financial markets can affect the so-called fundamentals which they are supposed to reflect. When that happens, markets enter into a state of dynamic disequilibrium and behave quite differently from what would be considered normal by the theory of efficient markets. Such boom/bust sequences do not arise very often, but when they do, they can be very disruptive, exactly because they affect the fundamentals of the economy.”

"What I need to do is to demonstrate that there are instances where the participants’ bias is capable of affecting not only market prices but also the so-called fundamentals that market prices are supposed to reflect."
 
MOB, I've been reading up on my Soros too and this relates to his view of reflexivity (the two way process between market beliefs and market expectations being one example of this). In my view, what he is saying is that short money can cause a re-evaluation of the fundamentals, which thus makes the fundamentals rather less than, er, fundamental. In essence, they are opinions and as such subject to pressures. But if it was simply weight of short money, the oil price would have collapsed long before it did, whereas, with hindsight, it can be argued that the weight of short money coming in (based on expectations of a global recession and consequent drop in demand for oil) prompted a re-evaluation of the fundamental case for oil as a finite commodity.
 
I am not sure I understand the point you are making. I don't think there is any prevailing consensus that the price of oil has collapsed due to oil being extensively shorted - so I don't think you need to absolve the short sellers from liability (and if they had caused it, I would have to acknowledge the world's debt of gratitude).

It is, however, commonly held ( perhaps not a prevailing consensus, but certainly commonly held) that the rapid increase in oil prices up to mid 2008 was largely prompted not by 'fundamentals' but by speculation which operated in a self-fulfilling-prophecy kind of way. This view holds that this price movement was not driven solely by fundamentals but by some very large speculative bets which had both as their object and effect the ramping up of oil prices.

See for example Irish times of 14th July

[broken link removed]

or New York Times of 21st August

http://dealbook.blogs.nytimes.com/2008/08/21/meet-the-mystery-oil-speculator/
 
Ah, I believe, on rereading your original post, that we are agreeing - the 'fundamentals' are subject to bias. That bias can push the price in a direction with the fundamentals being re-invented by the bias until a point comes where the price is ludicrous, there is an obvious shorting opportunity and the fundamentals are reassessed, or, perhaps, not so fundamental after all.

Sorry, I didn't read you quote of demoivre correctly initially and thought it was saying the opposite of what it was actually saying. :eek:
 
I posted this post below several months ago and I still think it is valid. The short selling excuse is just a red herring. I orignally said sterling and euro would reach parity by the end of 2010 (and was laughed at by some posters)...I have to admit I was wrong, should have said end of 2009!!!

A number of reasons - sterling has been losing steadily against the Euro ever since the Euro got bedded in. Dont see any reason why this trend will not continue.

A lot of developing countries who keep foreign currency reserves traditionally used a mixture of dollars and sterling as these are perceived to be safe currencies. The Euro has now joined this group and so instead of keeping e.g. 50:50 dollar/sterling reserves, many are in the process of switching to e.g. 1/3 each of dollar/sterling/euro. Some are even dumped sterling totally and going to 50:50 dollar/euro. Money, like everything else, is subject to supply/demand economics. Price follows demand. There is more demand for Euro and less for dollar and sterling hence Euro rises, and dollar and sterling fall due to a glut of these currencies on the market.

However bad the economy in the eurozone is, the UK economy is basket case and isnt getting better anytime soon.

In general terms, there has been a correction of the non-Euro currencies in EU member states, with the Euro getting stronger against them. UK wont buck this trend.

Confidence. When the Euro was first launched, it took a while for people to get confidence in it as a stable, reliable international currency. Euro is now establishing itself as such and so is rising.
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Csirl, would you predict any sort of turnaround during 2009 or do you think things will just go from bad to worse? Unfortunately I have to pay the majority of my suppliers in euros and it is crippling my business! Any advice? (apart from changing suppliers, which I can't do!) Would I be better off buying a lot of euros now?
 
Oyster said:
Csirl, would you predict any sort of turnaround during 2009 or do you think things will just go from bad to worse? Unfortunately I have to pay the majority of my suppliers in euros and it is crippling my business! Any advice? (apart from changing suppliers, which I can't do!) Would I be better off buying a lot of euros now?
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This interests me also but from the reverse perspective - I have the option of paying now or within the next 2 weeks.

With interest rate decisions due this week, what is the likely movement of sterling v euro over that time frame. Sterling has strengthened in the past few days...is this likely to continue or reverse...?
 
Sterling's strengthening appears to be linked to the anticipation of an imminent fall in EU interest-rates so the overselling of sterling witnessed in the past few weeks will halt..........possibly reverse.
 
I am a new entrant to this website and I have gone through a lot of the sterling v euro posts. I have to send £4,000 to the uk. Should have bought it last Friday - should I leave it for a while to see if stg slips again? Would appreciate an opinion.
thanks
 
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