The European Central Bank support is still paying off. With no single penny spent up to now, it has encouraged speculators to undertake a wide scale retreat to their winter quarters.
When everybody bet the Euro to fall markedly below the 1.20 barrier to the US dollar, it has undergone a sudden surge. Yet steam might be petering out as short positions have fallen to new lows. They stand now at one third of the level prevailing during the July turmoil, suggesting there might be little scope for further slackening moves.
The Euro volatility does undoubtedly contribute to dent prospects of a robust growth in the US and Asia. But at current levels it does fail to deliver the much needed stimulus the European economy is thriving for. The currency may even rise should rescue packages for Spain and in due course Italy be implemented in a smooth way, dispelling doubts on debt sustainability.
As the ECB is resisting pressures to bloat liquidity and further cut down rates, the odds are stacked against a lower Euro at least in the short run.
Preserving fiscal austerity doesn’t help either. The Euro zone is stuck in a protracted recession and ensuing production gap, while keeping a stern policy for reducing its imbalances. It may succeed in reining the public finances disarray but paying a high prize for achieving it. Even if monetary policy continues to pump in money to banks, it is kept in their vaults with no sign of inducing a credit expansion for the time being.
Europe being unable to enforce a recovery program, it badly needs external demand for mending its shortcomings. As it proves incapable to talk the Euro down, the ECB regarding it as tantamount to heresy, its relative strength turns into an unwarranted barrier for growth.
Only bolder moves by the ECB could shift this scenario.
But having taken a hard line on indebted countries rescue, it will hardly test extra measures unless the situation spins out of control. Don’t bet on it to enrol on a QE crusade nor to inject massive liquidity to break up the current credit crunch. A grim outlook when lowering the Euro to more sustainable levels seems a sensible policy issue.