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Euro Will Fall Further Unless European Union Can Agree on Greece

Euro Will Fall Further Unless European Union Can Agree on Greece

2010-03-19 23:27:00
David Rodriguez, Head of Business Development
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 EUR_2010-03-19

Euro Will Struggle to Develop a Trend with Greece Back in the Headlines

Fundamental Forecast for Euro: Bearish

 -       Euro tumbles on Greece debt crisis concerns

-       Suggestion that Greece may seek IMF bailout shakes confidence in EMU

-       German objections to EMU bailout spill into financial markets

The Euro was far and away the worst-performing G10 currency through the past week of trade, suffering once again due to continued struggles with the Greek fiscal crisis and questions on the stability of the European Monetary Union. Whether or not the EMU, International Monetary Fund, or individual Euro Zone countries will offer Greece a lifeline has been the topic du jour and the cause of great consternation. On the one hand, European Central Bank President and French President Nicolas Sarkozy have spoken candidly in favor of a Euro Zone-brokered agreement to assist Greece. On the other, Germany’s Angela Merkel has almost-vehemently cast aside the possibility of any such move. Continued political indecision and a Greece economy mired in fiscal problems may continue to hound the Euro and force further declines into the coming week’s trade.  

Euro traders have long awaited a concrete plan of action that solves lingering fiscal crises, but current deadlock suggests markets may have to wait yet longer. Whether or not Germany—a source of many of the most fervent Euro skeptics—can agree to any plan involving European funds may be of chief importance. ECB President Jean Claude Trichet essentially laughed off suggestions that a Euro Zone country would depend on assistance from the International Monetary Fund. The fact that the United States is the largest stakeholder in the IMF could single-handedly rule out any such bailout—especially as it would implicitly imply that the US holds leeway over the European institution. The alternative—an EU bailout—looks likewise untenable if the union’s largest economy has openly refused to any such deal. Financial markets want answers and resolution, and the lack of compromise could force further Euro losses through upcoming trade.

We would otherwise be remiss to completely ignore upcoming economic data, but it will take large surprises to force substantive moves surrounding the second-tier economic releases. The possible exception is German IFO business confidence survey data. IFO indices have steadily trended higher through recent months, and it will be interesting to watch whether fears over EMU unity will be enough to shake the relatively sanguine outlook for economic growth. The fact that even the Reserve Bank of Australia based its own outlook for domestic economic conditions underlines the interconnectedness of the global economy. Given Germany’s literal and figurative proximity to Greece and other debt-stricken economies, we can only assume that any contagion would be of great importance to German businesses. - DR

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