Investors are abandoning the euro at a rate not seen since the collapse of Lehman Brothers Holdings as Europe's worsening fiscal crisis threatens to splinter the 16-nation currency union.
Pension funds and banks this month sold euros at the fastest pace since the second half of 2008, when the currency tumbled more than 25% against the dollar between mid-July and the end of October, according to custodian Bank of New York Mellon. Demand for options giving the right to sell the euro against the dollar vs. those allowing for purchases rose on Wednesday to the highest level since November 2008.
“The assumptions that went into the makeup of the eurozone, and hence the euro, are now being brought into question and revalued,” said Eric Busay, a manager of currencies and international bonds at the $213.3 billion California Public Employees' Retirement System, Sacramento. “There are differences, and screaming differences, that have now been shown between the regions of the eurozone.”
“Central bankers and institutional investors have spent 10 years pricing out the likelihood of a eurozone breakup, and now they have to price it in again,” said Emma Lawson, a currency strategist at Morgan Stanley. “The euro will no longer have this additional support going forward.”
While the euro became a rival to the dollar after the common currency's inception in 1999, the debt crisis that began in Greece shows how it is being shaken by a country comprising 2.6% of the region's economy. The euro's 11% decline in the past six months made it the worst performer among its 16 most-traded peers. Standard & Poor's cut the credit ratings on Greece, Portugal and Spain in the last two days.
The euro traded at $1.33 in New York on Thursday afternoon, one day after it dropped to $1.3115, the lowest level since April 28, 2009.
Bank of New York Mellon's chief currency strategist, Simon Derrick, said the euro may tumble to $1.10 by the end of 2011. Morgan Stanley predicts it will trade at $1.24 by the end of 2010. Without central bank support, the euro's long-term fair value is $1.20, UBS AG said Monday.