The Euro Is Still Going To Fall. By Nicholas Hastings
All the European Union has done is postpone the inevitable.
"Shock and awe" may well be the buzzwords associated with the EUR750 billion surprise package aimed at propping up the single currency.
But with the risk of a Greek debt default as strong as ever, with the fiscal discipline of Spain and Portugal still in question and with the single currency swiftly losing its credibility as a reserve currency, the euro is still going to fall.
Yes, the mere fact that they have come up with this package, at such a high political cost to German Chancellor Angela Merkel, suggests that European politicians were galvanized by fears over the euro's future. They wouldn't have agreed to such extreme measures otherwise.
And with the European Central Bank prepared to compromise its independence by introducing fresh credit easing through government bond purchases, the importance of the package can't be underestimated. This is hardly a move the ECB would have made in normal circumstances.
Given this, it wouldn't be surprising to see the ECB even intervening if it looked as though the euro was heading back into the sort of sharp dive that we saw last week.
Therein, though, lies the problem.
If this package doesn't work in saving the euro, nothing will.
And there is little reason why investor confidence in the single currency will be any better now that it was before the weekend.
As the following graph shows, the euro's initial post-package rally was very short-lived:
Click Image to Enlarge
Not only has Merkel, the leader of the euro zone's largest member, put her political future on the line with the loss of regional elections at the weekend leaving her with a minority in the senate, but the package has cast doubt on the whole structure of the single currency.
If Greece, and for that matter Spain, Portugal and any of the region's other debtors, fail to adopt the fiscal discipline required to lower their deficits fast then the rescue package to will be seen as nothing more than a "get out of jail free card," warned Mitul Kotecha, head of global foreign exchange strategy with Credit Agricole in London.
The Maastricht Treaty which outlines the fiscal targets and gave the euro its credibility will have become essentially meaningless. Countries which have already stopped buying the euro as a reserve currency are only likely to step away from its even more.
But even if fiscal discipline of one sort or another is achieved, the euro's poor prospects will be cast by the declining outlook for the region's economic recovery and the extended period of low interest rates that is likely to prevail.
These risks hang over the euro even without the more immediate concerns over how the package will work, whether it will get parliamentary approval in a number of countries or its failure to address the very high private-sector debts in Spain and Portugal.
So while the euro has managed to rally back over the psychologically important $1.30 level, support for the single currency is unlikely to last long.
The euro is probably still headed down to the $1.10-$1.15 targets that existed before the EU attempted its own version of "shock and awe."
Early Tuesday, the euro fell back to $1.2710 from $1.2775 late Monday in New York, according to EBS. It was also down at Y117.69 from Y119.00 after Moody's warned that it would make "substantial changes" to Greece's A3 credit rating in weeks to come.
Speculation over more monetary tightening in China, possibly through an appreciation in the yuan, also helped the yen after news that data showed consumer prices growing faster than expected and retail sales continuing to rise rapidly. The dollar itself was down at Y92.51 from Y93.15.
The pound was weaker--down at $1.4816 from $1.4869--as investors remained wary of developments in the U.K. political scene. Although it looked as it negotiations over a Conservative coalition with the Liberal Democrats was well underway, the Liberal Democrats have now switched to holding discussions with the Labour Party after Labour Prime Minister Gordon Brown promised to step down by September.
"Shock and awe" may well be the buzzwords associated with the EUR750 billion surprise package aimed at propping up the single currency.
But with the risk of a Greek debt default as strong as ever, with the fiscal discipline of Spain and Portugal still in question and with the single currency swiftly losing its credibility as a reserve currency, the euro is still going to fall.
Yes, the mere fact that they have come up with this package, at such a high political cost to German Chancellor Angela Merkel, suggests that European politicians were galvanized by fears over the euro's future. They wouldn't have agreed to such extreme measures otherwise.
And with the European Central Bank prepared to compromise its independence by introducing fresh credit easing through government bond purchases, the importance of the package can't be underestimated. This is hardly a move the ECB would have made in normal circumstances.
Given this, it wouldn't be surprising to see the ECB even intervening if it looked as though the euro was heading back into the sort of sharp dive that we saw last week.
Therein, though, lies the problem.
If this package doesn't work in saving the euro, nothing will.
And there is little reason why investor confidence in the single currency will be any better now that it was before the weekend.
As the following graph shows, the euro's initial post-package rally was very short-lived:
Click Image to Enlarge
Not only has Merkel, the leader of the euro zone's largest member, put her political future on the line with the loss of regional elections at the weekend leaving her with a minority in the senate, but the package has cast doubt on the whole structure of the single currency.
If Greece, and for that matter Spain, Portugal and any of the region's other debtors, fail to adopt the fiscal discipline required to lower their deficits fast then the rescue package to will be seen as nothing more than a "get out of jail free card," warned Mitul Kotecha, head of global foreign exchange strategy with Credit Agricole in London.
The Maastricht Treaty which outlines the fiscal targets and gave the euro its credibility will have become essentially meaningless. Countries which have already stopped buying the euro as a reserve currency are only likely to step away from its even more.
But even if fiscal discipline of one sort or another is achieved, the euro's poor prospects will be cast by the declining outlook for the region's economic recovery and the extended period of low interest rates that is likely to prevail.
These risks hang over the euro even without the more immediate concerns over how the package will work, whether it will get parliamentary approval in a number of countries or its failure to address the very high private-sector debts in Spain and Portugal.
So while the euro has managed to rally back over the psychologically important $1.30 level, support for the single currency is unlikely to last long.
The euro is probably still headed down to the $1.10-$1.15 targets that existed before the EU attempted its own version of "shock and awe."
Early Tuesday, the euro fell back to $1.2710 from $1.2775 late Monday in New York, according to EBS. It was also down at Y117.69 from Y119.00 after Moody's warned that it would make "substantial changes" to Greece's A3 credit rating in weeks to come.
Speculation over more monetary tightening in China, possibly through an appreciation in the yuan, also helped the yen after news that data showed consumer prices growing faster than expected and retail sales continuing to rise rapidly. The dollar itself was down at Y92.51 from Y93.15.
The pound was weaker--down at $1.4816 from $1.4869--as investors remained wary of developments in the U.K. political scene. Although it looked as it negotiations over a Conservative coalition with the Liberal Democrats was well underway, the Liberal Democrats have now switched to holding discussions with the Labour Party after Labour Prime Minister Gordon Brown promised to step down by September.
- 11 May |
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