Euro is proving surprisingly popular as a funding currency
May 25, 2010
THE fastest convergence in short-term interest rates in almost a year is making the euro a surprise addition to currencies used to finance investments in higher-yielding assets.
"The hot guys are moving into using the euro as a funding currency," said John Taylor, who helps oversee $US7.5 billion ($9 billion) as chairman of the New York-based FX Concepts LLC, manager of the world's largest foreign-exchange hedge fund. "It's not quite as cheap as the yen but it's a lot safer in a crisis, because the worse the world looks the worse the euro looks."
Borrowing in euros to finance an investment in the Australian dollar, New Zealand dollar, Brazilian real and Norwegian krone returned 10 per cent in the past six months.
The same trade using the US dollar resulted in a 7.5 per cent loss, and a 7.4 per cent decline with the yen.
Deteriorating economic prospects in the euro zone have helped push down the cost of short-term borrowing in Europe relative to the US.
The London interbank offered rate, or Libor, for three-month loans in euros fell to within about 14 basis points of the dollar rate on May 21, according to the British Bankers Association. Libor for loans in dollars for three months was 0.497 per cent at the end of last week, compared with 0.636 per cent for euros, it said.
The European Central Bank's main refinancing rate is 1 per cent.
Bloomberg
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