Euro's Non-Dollar Falls Will Accelerate. By Nicholas Hastings
New worries about the U.S. economic recovery may be slowing the euro's slide against the dollar.
However, the single currency will still accelerate its decline elsewhere--falling even faster against the pound, the Swiss franc, the yen and even the Swedish krona as global market sentiment deteriorates.
See the euro's slide against the yen:
Click Image to Enlarge
Apart from fresh funding fears within the euro zone itself, along with increased political risks in Germany, the euro is facing further outflows as more doubt is cast over the pace of the global rebound.
For now, though, euro losses against the dollar should be tempered, not because investors are any more fond of the euro but because recent data suggests that the U.S. recovery is stalling.
Concern that the U.S. could face a 'double-dip' recession is so high that there is renewed talk that, rather than suspend its quantitative easing as expected, the U.S. Federal Reserve should be contemplating a new installment to help prevent deflation.
This is helping to take the shine off the dollar, which only a few weeks ago was rising on talk that the Fed will soon remove its promise to keep interest rates down at their record low levels for "an extended period".
Deepening concern about the U.S. economy has coincided with a rash of bad economic news elsewhere. The Japanese economy remains mired in deflation, sluggish euro zone monetary growth suggest that the region can't afford any rate hikes until well into 2011, and now estimates of Chinese leading indicators have been scaled back sharply.
A pledge by leaders of the Group of 20 industrial and developing nations meeting in Canada last weekend to slash fiscal deficits in half by 2013 means that the global recovery could be even more gradual and even more painful now.
This reassessment of growth prospects is bad news for the euro even before the latest developments in the euro zone debt crisis are taken into account.
On the funding side alone, plans for the European Central Bank to refinance a one-year facility for helping euro-zone banks with a three-month paper offering has been called "absurd" by Spanish banks given the continued high level of demand from the cash-strapped banking community.
Greek plans to return to the open market with its own offering next month is also seen as a high risk exercise that could damage the credibility of euro zone funding as a whole if it doesn't succeed.
Perhaps of even more significance for the euro is the test of German Chancellor Angela Merkel's authority as the Federal Assembly votes for a new president later Wednesday.
As Simon Derrick, a senior currency strategist at Bank of New York Mellon in London, pointed out, the vote is increasingly being taken as a vote of confidence in Merkel, who stuck her neck out to back a euro-zone wide bail out package for Greece that has cost the German tax player plenty.
If Merkel loses, much of the political glue that has been holding her government together could come unstuck, opening the way for a much less euro-sympathetic German administration to emerge some time in the future.
So while investors might not be too happy jumping out of the frying pan into the fire, or into the dollar, they will still be happy to jump elsewhere.
Early Wednesday in Europe, the euro was bouncing a little on short-covering after recent sharp losses, driven by fears over growth in the U.S. and in China and nervousness about the European Central Bank's plans for refinancing a one-year funding program for European banks on Thursday.
On Tuesday, the latest U.S. consumer confidence index from Conference Board plummeted unexpectedly to 52.9 from 62.7 and, after recent disappointing data from China, there are fears that the country's latest purchasing managers index on Thursday will fall under the key 50 level between economic growth and economic contraction.
By 0708 GMT, the euro had made it up to $1.2224 from $1.2196 late on Tuesday in New York, according to EBS. It was also up at Y108.32 from Y107.97.
The dollar is up at Y88.61 from Y88.54.
However, the single currency will still accelerate its decline elsewhere--falling even faster against the pound, the Swiss franc, the yen and even the Swedish krona as global market sentiment deteriorates.
See the euro's slide against the yen:
Click Image to Enlarge
Apart from fresh funding fears within the euro zone itself, along with increased political risks in Germany, the euro is facing further outflows as more doubt is cast over the pace of the global rebound.
For now, though, euro losses against the dollar should be tempered, not because investors are any more fond of the euro but because recent data suggests that the U.S. recovery is stalling.
Concern that the U.S. could face a 'double-dip' recession is so high that there is renewed talk that, rather than suspend its quantitative easing as expected, the U.S. Federal Reserve should be contemplating a new installment to help prevent deflation.
This is helping to take the shine off the dollar, which only a few weeks ago was rising on talk that the Fed will soon remove its promise to keep interest rates down at their record low levels for "an extended period".
Deepening concern about the U.S. economy has coincided with a rash of bad economic news elsewhere. The Japanese economy remains mired in deflation, sluggish euro zone monetary growth suggest that the region can't afford any rate hikes until well into 2011, and now estimates of Chinese leading indicators have been scaled back sharply.
A pledge by leaders of the Group of 20 industrial and developing nations meeting in Canada last weekend to slash fiscal deficits in half by 2013 means that the global recovery could be even more gradual and even more painful now.
This reassessment of growth prospects is bad news for the euro even before the latest developments in the euro zone debt crisis are taken into account.
On the funding side alone, plans for the European Central Bank to refinance a one-year facility for helping euro-zone banks with a three-month paper offering has been called "absurd" by Spanish banks given the continued high level of demand from the cash-strapped banking community.
Greek plans to return to the open market with its own offering next month is also seen as a high risk exercise that could damage the credibility of euro zone funding as a whole if it doesn't succeed.
Perhaps of even more significance for the euro is the test of German Chancellor Angela Merkel's authority as the Federal Assembly votes for a new president later Wednesday.
As Simon Derrick, a senior currency strategist at Bank of New York Mellon in London, pointed out, the vote is increasingly being taken as a vote of confidence in Merkel, who stuck her neck out to back a euro-zone wide bail out package for Greece that has cost the German tax player plenty.
If Merkel loses, much of the political glue that has been holding her government together could come unstuck, opening the way for a much less euro-sympathetic German administration to emerge some time in the future.
So while investors might not be too happy jumping out of the frying pan into the fire, or into the dollar, they will still be happy to jump elsewhere.
Early Wednesday in Europe, the euro was bouncing a little on short-covering after recent sharp losses, driven by fears over growth in the U.S. and in China and nervousness about the European Central Bank's plans for refinancing a one-year funding program for European banks on Thursday.
On Tuesday, the latest U.S. consumer confidence index from Conference Board plummeted unexpectedly to 52.9 from 62.7 and, after recent disappointing data from China, there are fears that the country's latest purchasing managers index on Thursday will fall under the key 50 level between economic growth and economic contraction.
By 0708 GMT, the euro had made it up to $1.2224 from $1.2196 late on Tuesday in New York, according to EBS. It was also up at Y108.32 from Y107.97.
The dollar is up at Y88.61 from Y88.54.
- 30 June |
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