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The euro bull run isn’t over yet, say currency analysts

Luke Graham
The euro has risen more than 14 percent against the dollar so far this year and this climb is expected to continue, according to several market analysts.

The euro has risen more than 14 percent against the dollar so far this year due to optimism about economic growth and fewer political risks, and this climb is expected to continue, according to several market analysts.

"Long euro is not really a crowded trade right now. There is reluctance to believe it will go a lot higher but there is still upward pressure at this point," Tom Clarke, partner and co-portfolio manager at William Blair told CNBC's Street Signs on Tuesday.

The common currency is currently the best performer among developed market currencies. It has traded between $1 and $1.40 over the past few years, so its current level is around the middle of the range, Clarke added. As such, the current bullish run of the currency isn't over.

Part of the reason for the euro's strength is that other major world currencies are looking less popular.

"I think it has moved too far too soon but ultimately it is optimism on European equities that is moving the euro," Christopher Peel, chief investment officer at Tavistock Investments, told CNBC's Squawk Box.

"No one wants the pound and no one wants the dollar."


Another advantage for the euro is underlying investor confidence in the euro zone. The monthly sentix Euro Breakup Index, which measures the percentage of investors who expect the euro to break apart, is currently near its all-time low; only 8 percent of the 1,000 institutional and retail investors surveyed believe the euro to break up within the next twelve months. That's down from around 25 percent near the start of the year.

"In August, the sentix EBI Index shows a surprising development. Although it was not lacking in issues that could cause investors to become unsafe, the investors show themselves astonishingly relaxed. The overall index falls to 8.0 percent, which is only just above the all-time low, which was measured in July 2014," said Manfred Huebner, CEFA and managing director of sentix.


Europe's improving growth contrasts with the U.K., which is losing economic momentum as it continues to deal with Brexit negotiations. This contrast has helped the euro rise 9 percent against sterling so far this year.

"We expect euro strength to be sustained against sterling owing to improving economic fundamentals in Europe; a narrowing interest rate differential; and continuing Brexit uncertainty that is likely to weigh more heavily on the UK economy," said Jaisal Pastakia, investment manager at Heartwood Investment Management, in an email.

However, Pastakia was more cautious on the euro/dollar outlook.

"Continuing euro appreciation versus the US dollar is more questionable. The strength of the euro is a concern for the European Central Bank, which is endeavouring to lift inflation to target," he said.

"Furthermore, investor positioning is extended in the euro versus the US dollar and potentially at risk of being unwound."

In terms of equities, William Blair's Clarke said there were opportunities in several euro zone economies such as Italy, Spain and France. Nandini Ramakrishnan, global market strategist at JP Morgan Asset Management, also had a positive outlook for European equities.

"The euro has strengthened a lot faster than a lot of us anticipated this year but this shouldn't threaten our overall positive view on European equities," she said on CNBC's Squawk Box.

While a stronger euro is a concern for exporters (as a more expensive currency makes their products more expensive and thus less attractive), Clarke was not worried.

"If you look at external trade as a fraction of the euro zone economy, trade outside the euro zone is not that large a fraction. The economy is fairly closed. What that means is the level of euro/dollar doesn't matter a great deal," he said.

The euro is currently trading at $1.2043 to the dollar and 92 pence to the pound .

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