Sterling rallies against the euro as Europe strives to contain debt - The Guardian

Sterling rose to a one-month high against the euro but amid the escalating crisis in Rome and Athens, the surprise is how robust the euro has remained against other currencies around the world.

Michael Derks, chief strategist at currency traders HiFX said: "Despite all of these negative forces, despite all of this apparent selling pressure and despite the real threat that Italy may soon be in the hands of its creditors, the euro is still trading at 1.38 [against the dollar]. To put this into perspective, the euro is only barely below the twelve month average of $1.3930."

On Wednesday £1 was buying €1.17, a rise of 0.6% on the day before, but sterling is still below the €1.20 rate it achieved at the start of 2011 and substantially below 2007, when British holidaymakers in Spain were enjoying €1.50 for every pound.

The relative strength of the euro has puzzled traders for some time. Data from the Commodity Futures Trading Commission, which releases a breakdown of currency bets on the Chicago Mercantile Exchange, shows that traders are still very significantly underweight in the euro. Meanwhile, US and Asian investors have been selling European bonds and equities, while US money-market funds have seen heavy selling out of euros. Yet the euro has barely moved against the dollar.

Currency strategists point to two factors. Firstly, it's bad pretty much everywhere else; Peter O'Flanagan at Clear Currency said: "Traders look at the UK's economic stagnation, low interest rates and austerity, and don't feel inspired. The Bank of England can also begin further rounds of quantitative easing and asset purchases, so I wouldn't be surprised to see further sterling weakness despite what's going on with the euro. The long-term goal of policymakers is to depreciate the pound to help exports and stimulate the economy."

The second factor is that an exit of Italy and other Mediterranean countries from the euro would leave it with a core of export-oriented Germany, France and Benelux countries. What would in effect be a super-Deutschmark would soar in value, and prove a nightmare for German exporters. It's one reason why, despite popular revulsion in Germany against a bailout of its southern neighbours, German industry is keen that the euro survives in its present form.

Speculators shorting the euro in the hope of making huge profits have so far been badly burnt. "For some time now, the currency trade de jour has been to short the single currency. Forests have been burned down to enable commentators to pen their analyses of why the euro project is doomed… but euro bears should be extremely mindful of the fact that the return from being short the single currency has been incredibly meagre over an extended period of time – hardly the price action of a successful position. Clearly, notwithstanding understandable reservations over Europe's deeply troubling sovereign debt and banking crisis, investors and traders still harbour huge concerns regarding the dollar as well. Committed euro bears ought to be worried," said Derks.

Another peculiarity of recent days is that the weakest currency has not been the euro, but the Australian dollar. With a commodity-driven economy selling into China, the Australian dollar has soared over the past five years. But in any crisis, there tends to be a switch away from 'risk' assets such as the Australian dollar, back into what still remains the world's safe haven currency, the US dollar.

There will be many British holidaymakers dreaming of a cheap holiday in Greece next year if the drachma returns, or a bargain villa in Tuscany bought with cheap lira. But don't count on the bank being open to do the transaction.