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Euro Plummets to 6-month Low as Greece Default Nears

Euro Plummets to 6-month Low as Greece Default Nears

2011-09-09 16:27:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Fundamental Headlines

Greece Must Keep Cutting or ‘Probably’ Exit Euro, Flaherty Says – Bloomberg

Germany Said to Ready Plan to Help Banks if Greece Defaults – Bloomberg

Stark to Leave ECB Over Bond-Buying – Reuters

U.S. Demands Action from Europe’s Strongest at G7 – Reuters

Obama’s Bid to Spur Growth – WSJ

European Session Summary

Although market participants may have been feeling slightly more positive about the medium-term outlook of the U.S. economy after President Barack Obama’s speech on the labor market last night, any optimism was erased after developments out of Europe today. An event that has been a long time coming, it now appears that Greece will default on its debt and / or be forced to leave the Euro-zone. On such news, risk-appetite quickly evaporated, leading to a mass exodus from European banking shares and higher yielding assets.

One of the biggest losers throughout the European trading session was the Euro. After breaking below the psychologically significant 1.4000 exchange rate yesterday after the European Central Bank maintained its key interest rate at 150-basis points while simultaneously employing dovish rhetoric, the EUR/USD hit a six-month low on Friday. Trading at 1.3645 at the time this report had been written, the EUR/USD was the second weakest currency pair on the day, just behind the EUR/JPY.

EUR/USD 1-minute Chart: September 9, 2011

Euro_Plummets_to_6-month_Low_as_Greece_Default_Nears_body_Picture_1.png, Euro Plummets to 6-month Low as Greece Default Nears

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The Euro was, in fact, the worst performing major currency across the board, even ahead of higher yielding currencies such as the Australian Dollar and the New Zealand Dollar, typically the two currencies that face increased selling pressure in times of risk-aversion due to their higher yields. The currency bloc was certainly not supported by the resignation of European Central Bank Executive Board member Juergen Stark, who apparently was leaving in protest of the central bank’s bond buying policy, according to sources. Although the European Central Bank said Stark was leaving for “personal reasons,” such a scenario is highly unlikely, given the state of European affairs.

Also weighing on the Euro were comments by Canadian Finance Minister Jim Flaherty, who said that “It’s necessary for the Greek government to stay the course…The alternative is probably that they leave the euro. I expect the Greek government would want to continue their fiscal consolidation.” The comments come from the G-7 meeting in Marseilles, France, where central bankers and finance ministers are having their first face-to-face talks since “coordinated action” was promised on August 8 to calm financial markets.

Thus far, on Friday, the Dow Jones FXCM Dollar Index is significantly higher, trading at 9728.58, at the time this report was written, after opening at 9628.85. The index has traded mostly to the upside, with the high at 9731.94 and the low at 9609.17.

24-Hour Price Action

Euro_Plummets_to_6-month_Low_as_Greece_Default_Nears_body_Picture_4.png, Euro Plummets to 6-month Low as Greece Default NearsEuro_Plummets_to_6-month_Low_as_Greece_Default_Nears_body_Picture_5.png, Euro Plummets to 6-month Low as Greece Default Nears

Key Levels: 15:30 GMT

Euro_Plummets_to_6-month_Low_as_Greece_Default_Nears_body_Picture_6.png, Euro Plummets to 6-month Low as Greece Default Nears

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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