Sinking Euro Tests Bull’s Mettle: “Our Endorsement Is Not Unconditional,” Axel Merk Says
Source: | Filed in
Currencies | 
Subscribe to Savvy Investor via RSS
6/10/10The euro is on track for its third straight daily gain after the ECB held rates steady at 1%, as was widely expected. The single currency was recently trading above $1.20, and famed speculator Jimmy Rogers told CNBC sentiment has become so negative the euro is due for a bounce.
Still, the euro is not far from its recent four-year lows and is down about 12% since mid-March, the last time Axel Merk, founder and president of Merk Investments and author of Sustainable Wealth, was on Tech Ticker.
At the time, Merk was resolutely bullish on the euro:
“People should have much more confidence in the euro to stomach any shock that would come from Greece,” Merk said on March 17, calling the euro’s decline vs. the dollar at that point a “great buying opportunity.”
Such optimism has taken its toll on the short-term performance of the Merk Hard Currency fund. While still ranked tops in its category for the past 3- and 5-year periods, the fund is down about 8% so far in 2010 and is underperforming many competitors, according to Morningstar.
Today, Merk says: “Our endorsement of the euro is certainly not unconditional.”
The fund has recently “pared down” its exposure to the euro as Merk predicts “more volatile” currencies such as the Australian and New Zealand dollars and the Norwegian krone are “likely to outperform” on any recovery.
A Very Healthy ‘Seismic Shift’
Unlike Rogers, who has questioned the euro’s long-term viability, Merk remains a long-term bull. The recent outbreak of austerity on the continent is a “very healthy process” and at the forefront of a “seismic shift in the G20,” he says.
Higher taxes and lower government spending in Greece, Spain, Italy, Portugal, Germany and others will almost certainly “crush growth” in Europe, Merk concedes. However, because the EU isn’t dependent on foreign money to fund a deficit, unlike, say, the U.S. or Australia, he says the euro can remain strong in the absence of growth, similar to the Japanese yen.
“In Europe, the fiscal consolidation combined with the very strong decline we’ve had in the euro may actually mean we’re [building] a very strong base here,” he says.
