The Euro Crisis Real-time updates and analysis of Europe's debt crisis January 11, 2013, 8:47 AM Draghi May

Regret a Stronger Euro

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By Nicholas Hastings

European Pressphoto Agency

European Central Bank President Mario Draghi

Mario Draghi’s commanding performance at Thursday’s European Central Bank press conference appears to have been a game changer. He has convinced the financial markets that the euro-zone debt crisis has turned a corner and that normality is finally returning.

S. And even Japan. the U. Now they may have to face even more if investor inflows into the region start to take off again. But there is one thing Mr. If its fiscal problems are resolved.Global risk sentiment has improved. now looks set to pursue more aggressive monetary and fiscal policies aimed at ensuring recovery. A stronger euro. as many in the market had expected. key bond yields among debtor countries have continued to fall and capital inflows have recovered. These export-driven economies have already had to face more than a 10% rise in the euro against the dollar over the last six months. All very well and good. . Mr. the ECB president has given the single currency an additional fillip just when the euro-zone economies don’t need it. recent signs of an improvement in the global economy mean that there should be an increased demand for euro-zone exports. Draghi has delivered that he may regret. Draghi himself admitted that the state of most euro-zone economies remains fragile and the risks for recovery remain on the downside. However. Economic expansion in China appears to be back on course after months when it looked as if the country could be facing a hard landing. should avoid the recession many feared would take place this year. All these countries are key markets for euro-zone manufacturers. which has been stuck in recession for years. Of course. the euro is now being faced with a lot more than just gains against the dollar. By suggesting at the press conference that the ECB will not cut rates again just now.

the Bank of England is expected to introduce even more monetarypolicy easing and drive the pound lower against the euro. So. And Mr.K.” according to the currency strategy team at BNP Paribas. despite government efforts to kick start a recovery. And. but it will also make implementation of key structural and fiscal reforms even harder. This will not only make the recoveries of these economies more difficult. . the euro is once again finding itself under heavy buying pressure against its Swiss counterpart. the euro could also become the focus of renewed reserve diversification by foreign central banks. the euro has already rallied sharply against the Japanese currency. Draghi may find that the strength of the euro could well make it even more difficult for the euro zone to recover from the debt crisis. To make matters even worse. the euro could be on the rise. “In our view.With the U. just as the euro-zone economies are struggling to prevent a slide into recession over the next few months. With Japan seeking to deliver a cheaper yen at nearly any cost. with Swiss banks now essentially charging investors for holding deposits in Swiss francs. the global FX reserves data show pent-up euro/dollar demand as emerging-market reserve managers are still overweight dollar and underweight the euro. economy still flat lining.