Going Global: The Euro's 'Soft Underbelly'; Tepid Growth Forecasts Elicit Some Bearishness on the Currency
Paris -- FOR MONTHS, the foreign-exchange market has been squarely focused on the huge U.S. trade and budget deficits, the weakening dollar, even the possibility of a dollar crisis. Now some money managers and others are beginning to examine the highflying euro's soft underbelly. What they see isn't very appealing.</br></br>Take Bridgewater Associates, a Westport, Conn., institutional bond and currency manager and one of the world's biggest institutional hedge-fund managers with just under $100 billion under management. The firm, whose managers have been longtime dollar bears, now has a short- euro position that's as big as its short position in the dollar.</br></br>Among major developed countries, the 12-nation euro zone "has the weakest economy, the lowest interest rates, the strongest currency and among the highest probabilities for significant capital outflow," says Bob Prince, Bridgewater's co-chief investment officer.</br></br>Shorting both the dollar and euro, Bridgewater is long the Swiss franc, pound sterling and Swedish krona. "And in particular, we like the yen against the euro," says Mr. Prince. While Bridgewater forecasts the euro to be little changed against the dollar in 12 months, the firm sees the euro roughly 15% lower at about 114 yen. In a little-noticed decline, the euro has already fallen to 134.71 yen from above 141 yen in late December.</br></br>Meanwhile, at a two-day shindig last week that Morgan Stanley hosts annually for its clients, "there was a remarkably strong sense that the dollar could surprise on the upside against several European currencies" and that the euro could decline against the yen and other Asian currencies, says Stephen Jen, the firm's global head of currency research. He suspects that this outlook largely reflects investors' reaction to the dollar's new-year's rally that has seen the euro retreat 4.5% against the U.S. currency since Dec. 30 to $1.3074.