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    Euro Traders Put Trust in Trichet as Merkel, Sarkozy Disappoint on Bonds

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    hurricanemaxi
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    Posts : 34
    Join date : 2011-08-10

    Euro Traders Put Trust in Trichet as Merkel, Sarkozy Disappoint on Bonds

    Post  hurricanemaxi on Mon 22 Aug 2011, 9:00 pm

    Foreign-exchange traders are putting their faith in Jean-Claude Trichet, betting the European Central Bank President will save the euro from a collapse predicted by everyone from George Soros to Paul Volcker.

    While the region’s debt crisis now threatens Italy and Spain after infecting Greece, Ireland and Portugal, the euro has appreciated 1.6 percent this year against a basket of nine developed-nation counterparts, according to data compiled by Bloomberg. Only the Swiss franc has done better. The currency shared by 17 countries gained last week as financial markets were roiled by further evidence that the global economic recovery is weakening.

    The strength underscores confidence in Trichet’s ability to prop up the currency until government officials reach a long- term agreement to reduce the region’s expanding budget deficits after Greece, Ireland and Portugal had their credit ratings cut to below investment grade. The ECB’s solution has been to buy government bonds, driving yields lower, and then draining the extra euros pumped into the financial system by the purchases before it can spark inflation.

    “A lot of people are scratching their heads and wondering why the euro has been so resilient and it’s because the ECB stepped in the market and took the pressure off the European banking system,” said Paresh Upadhyaya, head of Americas G-10 currency strategy at Bank of America Corp. in New York, who estimates the euro will end the year at $1.45. “That in turn helped support the euro and is why the euro is on the cusp of breaking $1.45 instead of on the cusp of breaking $1.40.”
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