Bloomberg News

Euro May Be Liability, Morgan Stanley’s Redeker Says: Tom Keene

January 24, 2012

Jan. 23 (Bloomberg) -- The euro may break a long-standing correlation with stocks this year as the region’s central bank buys bonds, according to Morgan Stanley’s Hans-Guenter Redeker.

“This is going to be the year where we are stepping away from where the euro is used as an asset currency, and it is going to convert into a liability currency,” Redeker, the head of currency strategy at Morgan Stanley in London, said in a television interview on “Surveillance Midday” with Tom Keene. “We are potentially going back to the relationship with the euro and the asset class, as where we were in 2002, at that time it was negative.”

The 17-nation currency has fallen 6 percent against the dollar since October, while the Standard & Poor’s 500 Index has gained 5 percent, and the correlation between the two dropped to 55 percent from a record 91 percent in November, according to data compiled by Bloomberg.

The 17-nation currency gained nearly 0.7 percent to $1.3018 at 2:32 p.m. in New York after reaching the highest level since Jan. 4.

According to Redeker, the expansion of the European Central Bank balance sheet and interest-rate projections “falling sharply” are potential reasons for the decoupling.

“Fast Money”

While the euro touched its highest value in nearly three- weeks, Redeker said the gains may be attributed to investors with recent short positions on the common currency taking their, “fast money.” A short position is a bet that an asset will decline in value.

Redeker cited $1.35 as a fair value for the euro, but said he believes it will settle lower because the currency is only “as strong as it weakest link.” Looking across the euro zone, Redeker cited Italy as a good example. He valued the Italian euro at only $1.20.

After nearly three months of decline, Redeker said he sees the euro value settling in around $1.32. He did warn short investors that the rise in value may continue for two or three weeks before they should feel comfortable going back to a euro short position.

--Editor: Paul Cox, Dave Liedtka

To contact the reporter on this story: Austen Sherman in New York at asherman18@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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