Q. I just cannot understand the EUR/USD. Is this a anti USD play? Or is this just a short squeeze? Reserve diversification. What more bad news does it need to start trending down?
A. EUR/USD is being supported by reserve diversification but a large part of the underlying strength is a result of the deleveraging of European bank balance sheets. In order to clean-up over-leveraged balance sheets, banks are shedding assets overseas in unprecedented amounts and bringing capital back to Europe.
Here is one recent example of one such divestiture. There are countless more like them as money is pulled from the US, Latin America and Asia.