Euro/Dollar Fall Will Come--But Slowly. By Nicholas Hastings
Blowing the euro/dollar down and out of its recent narrow trading range could take some time.
Last week's news that Greece is about to seek an actual bailout on its debt is hardly good news for the euro.
However, disappointment that the Fed isn't closer to hiking interest rates in the U.S. isn't good news for the dollar either.
As a result, the currency pair has once again shown little momentum in either direction and has slumped back into trading either side of $1.36.
See the euro's recent moves against the dollar:
Click Image to Enlarge
Nevertheless, a downside break in the euro still remains more likely as, with U.S. data still showing a strengthening economic recovery, it will only be a matter of time before dollar yields start to discount a rise in interest rates.
The timing, of course, will probably depend very much on any increase in inflationary pressures as much as anything else.
San Francisco Fed President Janet Yellen helped to drive this point home at the end of last week with her suggestion that current "subdued" inflation levels aren't distorted too much by weak house prices.
Her comments very much echoed the dovish stance taken by Fed Chairman Ben Bernanke earlier in the week when he repeated that interest rates will remain at their current low levels for an extended period. Many had hoped he was going to use his latest appearance in front of Congress to signal that tighter policy is on its way.
So, anyone expecting yield differentials to move in favor of the U.S. currency were disappointed.
The euro, though, was hardly able to capitalize on that as Greece edged ever closer to activating its debt rescue package.
Until last week, the hope was that the package would reassure the investment community enough to allow Greece to continue funding its budget deficit by raising competitively-priced funds in the market.
However, a small note auction last week proved that while investors may be prepared to continue lending to Greece they will only do so at a high price.
By the end of the week, Athens was admitting that another bond auction due to be offered to U.S. investors was hardly likely to be successful and that it is now requesting formal negotiations with the European Union and the International Monetary Fund.
In essence, such a move suggests that all the negotiations aimed at ensuring that Greek could help itself have now failed.
This not only means that the rather vague promise by the E.U. and the IMF to make EUR45 billion available to Greece will now have to be hammered out in more detail, but that Germany, the main provider of the funds, will now have to gain constitutional court permission to participate.
Hans Redeker, head of global foreign exchange strategy at BNP Paribas in London, said it all: "Greece activating the aid package is a sign of failure and will be watched by the German government with horror."
"The Merkel administration has hoped that the pure existence of the aid package would prevent funds from the package being drawn, but now as the aid package is likely to be activated it will only take a number of days before the German constitutional court swings into action," Redeker warned.
If that happens, then it isn't just Germany's key participation in the package that will be put in doubt, but the whole future of its participation in the euro could be in question.
Early Monday in Europe, the euro was coming under pressure, as were most other high-yielders, as investors once again headed for safe havens.
Tumbling stocks, driven by the news that Goldman Sachs has been charged with fraud by the Securities and Exchange Commission and fears that this will impact other U.S. banks, and a delay in an Athens meeting of E.U. and IMF officials because of European airport closures, are both driving sentiment lower.
By 0645 GMT, the euro was down at $1.3439 from $1.3506 late Friday in New York, according to EBS. The single currency was also down at Y123.34 from Y124.47, while the dollar fell to Y91.79 from Y92.15.
Last week's news that Greece is about to seek an actual bailout on its debt is hardly good news for the euro.
However, disappointment that the Fed isn't closer to hiking interest rates in the U.S. isn't good news for the dollar either.
As a result, the currency pair has once again shown little momentum in either direction and has slumped back into trading either side of $1.36.
See the euro's recent moves against the dollar:
Click Image to Enlarge
Nevertheless, a downside break in the euro still remains more likely as, with U.S. data still showing a strengthening economic recovery, it will only be a matter of time before dollar yields start to discount a rise in interest rates.
The timing, of course, will probably depend very much on any increase in inflationary pressures as much as anything else.
San Francisco Fed President Janet Yellen helped to drive this point home at the end of last week with her suggestion that current "subdued" inflation levels aren't distorted too much by weak house prices.
Her comments very much echoed the dovish stance taken by Fed Chairman Ben Bernanke earlier in the week when he repeated that interest rates will remain at their current low levels for an extended period. Many had hoped he was going to use his latest appearance in front of Congress to signal that tighter policy is on its way.
So, anyone expecting yield differentials to move in favor of the U.S. currency were disappointed.
The euro, though, was hardly able to capitalize on that as Greece edged ever closer to activating its debt rescue package.
Until last week, the hope was that the package would reassure the investment community enough to allow Greece to continue funding its budget deficit by raising competitively-priced funds in the market.
However, a small note auction last week proved that while investors may be prepared to continue lending to Greece they will only do so at a high price.
By the end of the week, Athens was admitting that another bond auction due to be offered to U.S. investors was hardly likely to be successful and that it is now requesting formal negotiations with the European Union and the International Monetary Fund.
In essence, such a move suggests that all the negotiations aimed at ensuring that Greek could help itself have now failed.
This not only means that the rather vague promise by the E.U. and the IMF to make EUR45 billion available to Greece will now have to be hammered out in more detail, but that Germany, the main provider of the funds, will now have to gain constitutional court permission to participate.
Hans Redeker, head of global foreign exchange strategy at BNP Paribas in London, said it all: "Greece activating the aid package is a sign of failure and will be watched by the German government with horror."
"The Merkel administration has hoped that the pure existence of the aid package would prevent funds from the package being drawn, but now as the aid package is likely to be activated it will only take a number of days before the German constitutional court swings into action," Redeker warned.
If that happens, then it isn't just Germany's key participation in the package that will be put in doubt, but the whole future of its participation in the euro could be in question.
Early Monday in Europe, the euro was coming under pressure, as were most other high-yielders, as investors once again headed for safe havens.
Tumbling stocks, driven by the news that Goldman Sachs has been charged with fraud by the Securities and Exchange Commission and fears that this will impact other U.S. banks, and a delay in an Athens meeting of E.U. and IMF officials because of European airport closures, are both driving sentiment lower.
By 0645 GMT, the euro was down at $1.3439 from $1.3506 late Friday in New York, according to EBS. The single currency was also down at Y123.34 from Y124.47, while the dollar fell to Y91.79 from Y92.15.
- 19 April |
- 0 comments
Post new comment