The Euro: Are Investors Buying into the Collapse?

Henry Truc |

Merkel EuroThe current debt crisis facing the European Union has brought no shortage of questions regarding the stability of the euro and has even raised concerns of whether the currency will survive through the next few years. With Portugal and Greece dealing with their own complete financial quagmire, other countries in the Union face a tough decision on how to handle these "periphery" members. Stronger economic nations such as Germany, Austria, Finland and a few others, have been weighed down by the laggards in the eurozone.

Portugal is the latest member to ask for a large bailout as it tries to fix its financial infrastructure. Earlier today, the country said it would need 70 billion euros to cover its debt as it implements a "very ambitious" plan over the next three years to reform. What doesn't help is the current political uncertainty in Portugal, coupled with the recent Fitch  downgrade of the country's credit rating.

“It’s pretty inevitable” that Portugal will need a rescue, said Jacques Cailloux, a London-based economist at Royal Bank of Scotland Group Plc. “The market will deteriorate in the absence of other measures going through. There is obviously the risk of further downgrades, which will become anticipated by the markets and be a self-fulfilling prophecy.”

But already burdened by the previous bailouts of 110 billion euros promised to Greece and an additional 85 billion euros to Ireland, stronger nations in the EU are now understandably a bit a hesitant to break the bank once a gain.

Who's Investing in the Euro

Despite all this, the euro rallied today against the Japanese yen and U.S. dollar, going as high as $1.42. Why? Because of the EU Summit taking place, and speculation that the European Central Bank will increase the cost of borrowing for countries in need of bailout funds.

“What we’re doing now is buying the rumor on an ECB rate hike and then we’ll sell the fact when it materializes,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “The euro is still going to make new highs.”

What results from the summit and what the ECB plans to do next most likely will decide the fate of the euro. Both famed investors Warren Buffett and Jim Rogers have stated that investors shouldn't be surprised if the currency does indeed collapse. Rogers, however, does own euros in his portfolio and says he wouldn't be against buying more if there is a dip. So take that for what it's worth.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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