(The author is editor-at-large for finance and markets at
Reuters News. Any views expressed here are his own)
LONDON, Oct 23 (Reuters) - If Europe's joint debt sales did
lift the euro/dollar exchange rate this week, as some suspect,
then the European Central Bank may struggle to keep a lid on the
currency in the face of almost 1 trillion euros more of such
sales over the next six years.
After surging more than 10% between March and August as
economies and markets bounced back from the pandemic shock, the
world's key Transatlantic exchange rate has stalled ever since
just below $1.20 per euro.
ECB protests at excessive euro appreciation played a part in
warning traders off the currency, although dollar losses were
also staunched by a rule of thumb that more U.S. fiscal spending
will weaken the greenback. As a result, deadlocked fiscal talks
in Washington as the election nears have, in effect, supported
But one additional argument for a higher euro/dollar was
made this week after a blowout 17-billion-euro European Union
bond sale was oversubscribed some 14 times and drew heavy bids
from foreign central banks and reserve managers.
The EU raised the cash from the sale of 10 and 20-year
"social" bonds, its first joint debt funding for the so-called
SURE unemployment relief scheme. The 233 billion euros in bids
received was the highest demand for a bond sale ever recorded.
While that bodes well for the rest of the 100-billion-euro
SURE scheme through next year, it also tees up 800 billion euros
in joint bonds for its post-pandemic Recovery Fund between 2021
and 2026. Such bonds are a godsend for funds desperate for paper
badged Environmental, Social and Governance compliant.
In the trading sessions surrounding Tuesday's deal,
euro/dollar climbed a cumulative 1.4% even as governments across
the continent ramped up restrictions amid a swelling second wave
of the pandemic. Some banks, including Morgan Stanley, said
positivity surrounding the deal may have helped the euro higher
but doubted any long-term effect as buyers would likely sell the
bonds on to the ECB at a later date.
But Deutsche Bank currency strategist George Saravelos
reckons unusually high demand from central bank reserve managers
for the 10-year issue was significant. Their 37% share of the
sale was almost twice that of previous such issues, he said, and
these bonds would be bought to hold.
"Central banks are usually unhedged investors so strong
demand for a bond means direct demand for euro/dollar,"
Saravelos argued. And "it signals a vote of confidence on the
euro as a reserve asset, particularly at a time when the
dollar's dominant role is being questioned".
"Europe has just started to provide a new investment
destination for reserves looking for a home."
A long-standing dollar bear, Saravelos reckons the U.S.
currency has much further to sink as the Federal Reserve soaks
up more fiscal spending next year stateside via bond-buying and
the U.S. trade deficit expands to new records.
With Asian economies such as China or South Korea building
much of the surpluses that mirror the U.S. deficit, and also
leading a post-pandemic economic recovery, the dollar is falling
fastest there - seen in the yuan surge to two-year highs this
Likely intervention by those central banks, to buy dollars
to rein in their own currencies, will lead to more
dollar-reserve accumulation, says Saravelos. These then get
partly diversified to euros in turn - often banked in European
bonds, he adds.
But if the euro gets this sort of lift from central bank
activity in a bond sale of just 17 billion euros, then there are
big questions about what may happen if that's replicated through
hundreds of billions of euros of sales over the years ahead.
There are caveats. Central bank take-up was far less in the
20-year sale, probably as reserve managers tend to avoid such
long-term debt. There's also no guarantee their participation
will be as high going forward and some will just replace other
AAA euro bonds such as German bunds with the EU joint paper.
The ECB, which meets next week and has already stressed the
importance of the exchange rate in its inflation and economic
goals, will probably see the fiscal action requiring the debt
sales as the overwhelming priority and euro gains an irritating
But repeated comments from President Christine Lagarde and
chief economist Philip Lane in recent weeks left markets in no
doubt about ECB sensitivity to further euro appreciation - not
least with its 2022 inflation forecast of 1.3%, far below target
and made even before a second wave of the virus hit hard.
The ECB has many much more pressing economic reasons to step
up its monetary easing further - and possibly even cut its
already negative policy rate again. But the euro is likely an
important factor in there as the inflation horizon darkens.
Estimating that the Fed's balance sheet expanded 16
percentage points more than the ECB's since March, a research
paper released on the ECB website this week said that the
disparity in bond buys likely accounted for 6% of euro/dollar's
10% rise between March and September.
The ECB board will know that well.
(by Mike Dolan, Twitter: @reutersMikeD; Editing by Pravin Char)