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Foreign Exchange

Axel Merk: Draghi’s genius a turning point for euro

Investors have not woken up to it, but last week might have been a game changer for the euro, argues Axel Merk, CEO of Merk Investments.

Merk believes Mario Draghi, president of the European Central Bank, took tail risks out of the eurozone, while at the same time forcing closer financial integration. “He did it all while keeping the ECB out of some political minefields. It's pure genius,” says Merk. “The initial market reaction suggested he might have lost a battle, not realizing that he is winning the war.”

Dismayed by the lack of leadership in Europe, Merk had been staying away from the euro in his Hard Currency Fund, which has more than $500 million under management.

 
 Axel Merk: "Draghi's
 action is pure genius
 because it dramatically
 accelerates fiscal
integration in Europe"

“As of late last week, those dynamics changed; we are giving the euro another chance, not only because of substantial short covering potential, but also because Draghi’s 'whatever it takes’ approach might bring about seismic changes in how European integration, and fiscal and monetary policy, move forward,” says Merk.

In essence, Draghi told the world that the ECB would act like a central bank of a United States of Europe if the integration of European fiscal policy were to accelerate.

“Draghi’s action is pure genius because it dramatically accelerates fiscal integration in Europe,” says Merk.

He believes that few will share his view, initially at least, that Draghi’s actions were so astute.

That is because Draghi did not offer the immediate relief to which stimulus-addicted investors have got accustomed, such as an aggressive programme of peripheral eurozone bond purchases.

“But Draghi understands that the best short-term policy may be a good long-term policy,” says Merk.

He says he is giving the new framework a chance since it amounts to the greatest progress in the eurozone debt crisis seen to date.

“Make no mistake about it: we are only putting our foot in the water; we are not yet wholeheartedly embracing the euro,” says Merk. “The coming months will show whether this is to be written off as a trading opportunity or whether it is the new strategic direction that it has the potential of being.”

Nevertheless, he says with the Federal Reserve looking likely to engage in a fresh round of quantitative easing in the US just as Draghi presents a new framework for future action to tackle the eurozone debt crisis, the prospects for higher EURUSD look promising.

“For now, with the prospect of ECB action – even if with delays and no guarantee – a number of tail risks have been taken out of the eurozone,” says Merk. “In our assessment, that alone warrants a significantly stronger EURUSD. We believe there’s a new wind blowing in the eurozone. That wind may well take the tailwind of recent months out of the dollar.”

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