The resilience of the euro against the dollar to the deepening crisis in Greece – the exchange rate is currently close to its level at the end of May – has probably been due to a combination of factors. These include the unwinding of large short positions in the currency; a shrinkage in the expected gap between interest rates in the US and the euro-zone; a belief that there would be a limited fall-out from a Grexit (indeed, that the euro-zone might ultimately be better off if it were to happen); the fact the euro now appears undervalued on some metrics; and the euro-zone’s growing current account surplus. Looking ahead, our view is that the euro would fall initially in the event of a Grexit. Indeed, after creeping higher against the dollar between the end of May and mid- to late-June, the euro has since come off the boil as the crisis has escalated. Nonetheless, we doubt its slide would last long, provided that contagion was contained.
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