--Jen: History will be more kind to ECB than to Fed
--Jen applauds Draghi's move to preserve independence of ECB
--Jen sees euro fall as low as $1.10 before year's end as possible
By Min Zeng
Stephen Jen is a pronounced euro bear, but he gave a ringing
endorsement of Mario Draghi's new game plan for the euro zone's debt
crisis Thursday, even as disappointment that the European Central Bank
president delivered little permeated global markets.
U.S. stocks sold off while yields on 10-year government bonds in Spain
and Italy rose as investors fretted over what many saw as Mr. Draghi's
failure to live up to his promise last week to do "whatever it takes"
to preserve the euro.
Many investors had looked for Mr. Draghi to announce an immediate
program of bond-buying for the sovereign debt of the euro zone's
biggest trouble spots. When all he unveiled was a set of guidelines
for how governments would need to first meet tough preconditions
before aid was forthcoming, many investors felt their hopes dashed and
responded by hitting the sell button.
Not Mr. Jen, however. The managing partner at London-based hedge fund
SLJ Macro Partners, and one of the world's best-known currency
strategists, applauded Mr. Draghi's message as one that pressures
euro-zone governments into reform and preserves the central bank's
independence.
"We all know [that] what the ECB might do will only buy time.
Therefore, it is much better for Europe if the ECB could render help
only on the condition of more actions from the governments," Mr. Jen
said in a telephone interview Thursday from his office in London.
Mr. Draghi said euro-zone countries need to officially ask for aid and
that the region's bailout funds should be the first line of assistance
before the ECB steps in. Furthermore, any bond purchases by the ECB
would be in short-dated maturities rather than long-dated bonds, an
approach different from a prior bond-purchase program that has been on
pause for months.
"The ECB's proposal protects the institutional integrity and the
credibility of the ECB," said Mr. Jen.
In contrast, Mr. Jen argues that the Federal Reserve has exerted "zero
leverage" on the U.S. government, and has therefore created a
"significant" moral hazard problem.
"History will be more kind to the ECB than to the Fed," he added.
Still, Mr. Jen maintains his stance that the euro will weaken. Even if
the ECB acts to support the euro zone, the efforts would be
overshadowed by deepening economic woes in the zone, which he believes
won't be fixed in the short run.
In fact, he argues that a softer euro would help support the region's
growth outlook because it would make exports from the region, such as
from Italy, more competitive in global markets.
Mr. Jen expects that a further slide of the euro to "anywhere from
$1.18 to $1.10" would be possible before the end of the year if the
euro zone's crisis continues to deteriorate.
The euro has declined by more than 6% so far this year and recently
traded at $1.2172.
Still, the euro is far above the trough that was hit in October 2000,
22 months after the launch of the common currency in 1999. That, Mr.
Jen said, signals that the euro is still expensive, even as some
analysts believe $1.20 is the euro's fair value.
"More reforms will be good for Europe in the long run. However, there
is no way to avoid a deep recession in Europe," said Mr. Jen. "Stay
short the euro."
One risk in selling the euro versus the dollar is the Fed, said Mr.
Jen. If the Fed prints more money to support the U.S. economy in
coming months, this may spur selling in the dollar.
In the longer term, if the euro zone successfully carries out all the
reforms and moves closer to a fiscal union, the euro could rally back
toward $1.50, said Mr. Jen.
"That is a long shot," he said. "For the moment, I don't think the
worst of the euro zone is behind us."
-Stephen L. Bernard contributed to this article.
Write to Min Zeng at min.zeng@dowjones.com
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(END) Dow Jones Newswires
August 02, 2012 16:02 ET (20:02 GMT)
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