Nov 22, 2011 -- The euro will drop by the end of the year as the region’s sovereign-debt crisis deepens, pressuring investors who have buoyed the currency by repatriating assets to rethink their strategy, according to Nomura Holdings Inc.
The 17-nation currency has traded at least 12 percent higher this month than its lifetime average as European investors brought home 65.9 billion euros ($89 billion) in August and 11.6 billion euros in September, higher than the 12-month average of 629 million euros in inflows, according to European Central Bank data compiled by Bloomberg.
The inflows may not continue to be so strong as rising bond yields in Italy and Spain increase concern about contagion in the region and damp investor appetite for European assets, said Nomura’s Jens Nordvig, a managing director of currency research in New York.
"You have to evaluate the strength and persistency of this repatriation trend,” Nordvig said in a telephone interview. "Given how the crisis is worsening on an almost daily basis, the pressure on the inflow side is going to be very persistent. Eventually that will win out, and we’ll see the euro lower.”
The euro fell 0.2 percent to $1.3496 at 4:18 p.m. in New York. The currency has traded in a range of $1.3871 to $1.3422 this month, above the average of $1.2042 since its 1999 debut. Nordvig estimates the euro will end the year at $1.30.
Yields on Italian 10-year bonds reached a euro-era record of 7.48 percent on Nov. 9 as concern increased that the nation won’t implement austerity measures. A surge in borrowing costs drove Italy and Spain to replace their governments this month.
European investors repatriating foreign funds likely did so to raise cash they may need for redemption payments, Nordvig said. The world’s largest developed nations typically bring money home in times of risk aversion, as opposed to emerging countries, which see an increase in foreign investment by local investors in times of turmoil, he said.