For the second day running we’ve heard reports of members of the Eurosystem of central banks protecting the euro. Friday they were rumored to have bought EUR/USD in the 1.2850 area and today when prices returned to that level they were rumored to have called around and “checked rates”, letting banks know that they were snooping around.
Why would a “country” that is dependent on exports try and shore up its currency amid a global economic slowdown? Shouldn’t they let the euro fall as far as it can? In ordinary circumstances, yes. But these are anything but ordinary circumstances. It looks as though the ECB is trying to avoid a Lehman-style run on the euro. In the Lehman case, investors would short the stock and buy the credit default swaps. In the euro case you would sell the currency and sell the bonds of the weak European credits like Greece (which yields over 300 bp over Germany today) and Spain.
By supporting the currency, they are trying to paper over the very severe crisis in European credit markets. My guess is that this may work for a few days, but the longer-term result will be to alert the market that where there is smoke, often there is fire. This one bears close watching.
