By Stephen Sandelius

PARIS (MNI) – Aside from a possible brief rally on a successful
outcome of the summit of EU leaders on Thursday, the euro is unlikely to
gain lasting support from the solutions proposed for the Eurozone debt
crisis, analysts argue.

“If they deliver broadly what’s expected, I think you’ll get a
little bit of a relief rally, a knee-jerk positive reaction to the news,
but it won’t last very long,” predicted Paul Robson, forex analyst at
the Royal Bank of Scotland.

“We don’t expect it to be significant, because I think people are
expecting something positive already” — even though expectations are
“quite low”, he explained.

In reaction to some promising official declarations, there has been
a reduction in short positions euro-dollar, which has supported the
single currency in recent days, the analysts noted.

“I think the sense in the markets is they are not selling the euro
today and will wait and see what comes out Thursday,” said Chris Turner,
head of foreign exchange strategy at ING. “The assumption is that if
policymakers don’t meet market expectations, they’ll resell the euro
thereafter.”

“If Greece’s huge stock of outstanding debt is just reshuffled,
then the euro might get a 1-2 cent bounce at most, then fall back quite
quickly,” he said.

“Any further bounce would rather be limited unless they really
shocked and pulled some solution out of the bottom drawer that no one
had even envisioned at all,” Turner said.

“Something very substantial” might lift euro-dollar to $1.44 or
$1.45, Turner ventured. “But it’ll be a question of how far the euro
rallies before you can resell it.”

The analysts view the fiscal problems of Greece and other
peripheral countries as too serious and the capacity of political
leaders as too limited to resolve the sovereign debt crisis in the
foreseeable future.

“It’s a huge challenge, and I think the market suspects that it’s
probably beyond them,” Turner said. “The bar is very high that the
market has set.”

“We cannot expect a miracle solution,” agreed Natixis analyst Cyril
Regnat. If the stalemate in Washington over the U.S. debt ceiling is
overcome, there could be “a return of the declining trend of the euro.”

“In the short term, I would profit from small rebounds to sell the
euro against the dollar” with a target of $1.40, he advised. “It could
go lower, given the difficulties of European countries to reach an
accord.”

A “market-friendly event” involving an enlargement of the European
Financial Stability Facility and an extension of loans to Greece with
lower interest rates could be supportive of the euro, “because people
would say the core is much more committed to helping Greece,” Robson
said.

On the other hand, “more aggressive” private sector involvement
could have the opposite effect, “because that unsettles financial
markets,” he said.

Without flanking measures to support banks, a write-off of
30% of Greece’s debt might freeze up money markets, leading to even
weaker growth in the Eurozone and a loss in tax receipts, Turner warned.

“The concept of slow growth not generating sufficient tax revenues,
missing [deficit] targets, is really hanging over the markets in a deep
way,” Turner said. As the “prescription of massive austerity” — which
“hasn’t worked” in Greece — is extended to other high deficit
countries, the bearish position on the Eurozone and its currency may be
reinforced, he suggested.

“I think short-term the market doubts this method for reducing debt
and delivering the solutions they require,” Turner explained. The risk
premium on the Eurozone is “likely to hang with us for another year or
so,” which would continue to favor the Swiss franc as a safe haven.

Even a courageous decision to double the size of the EFSF could
prove risky if investors are hesitant to buy up its bonds, knowing well
that the resulting debt is added to the books of the governments that
stand behind the fund, Regnat said.

A better solution would be for the European Central Bank to
relaunch and expand its bond purchases rapidly in the secondary markets
of countries under market pressure, thereby driving down yields and
facilitating the return of these governments to debt markets, the
analyst argued, while recognizing that ECB is dead-set against such a
strategy.

Given the “rather glacial” pace at which European leaders grope for
a longer-term solution to the crisis, the single currency is more likely
to weaken rather than appreciate in the months ahead, especially if the
U.S. economy picks up, Robson predicted, targeting a euro-dollar in the
low $1.30’s towards the end of the year.

“Why we think longer-term the euro is struggling is that there
won’t be any framework put in place” to stem the spread of the debt
crisis, he explained.

–Paris newsroom +331 4271 5540; Email: stephen@marketnews.com.

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