Euro Gains Face `Death by Thousand Cuts' on Economy, Bank of Tokyo Says

The euro’s gains against the dollar are unsustainable amid concern that nations on the currency region’s periphery will default on their debts, according to Bank of Tokyo-Mitsubishi UFJ Ltd.

“The euro’s recent rally has pushed it back into overvalued territory against the backdrop of still deteriorating fundamentals,” Lee Hardman, a currency strategist at Bank of Tokyo in London, wrote in an investor note. “This is remarkable, and signals to us that it will ultimately prove unsustainable. The euro is metaphorically speaking facing ‘death by a thousand cuts.’”

The euro’s rebound from its low of 1.1923 on June 7 has been driven by its role as the “anti-dollar”, Hardman said, as investors speculated a sluggish recovery will prompt the Federal Reserve to increase monetary stimulus for the U.S. economy.

The European currency climbed 0.8 percent to 1.3418 per dollar at 11:47 a.m. in London. It headed for a second week of gains, rising 2.6 percent this week.

The currency’s “anti-dollar status is no longer compelling” as Irish and Portuguese bond yields continue to widen against those of German bunds, increasing the chance the nations may be forced to seek external funding from the European Union or International Monetary Fund, Hardman wrote.

“The euro’s recent renaissance is running on borrowed time, with euro-dollar in the mid to high 1.30’s likely to prove very attractive medium-term sell levels,” he wrote.

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