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The euro’s resilience in the face of the eurozone’s sovereign debt crisis has finally evaporated; the single currency has slid to a 16-month low against the U.S. dollar and an 11-year low against the Japanese yen. FT Lex’s Vincent Boland and Jennifer Hughes discuss the move’s significance and its implications. Please click here or on the image below to watch the video.
Source: Financial Times, January 7, 2012. 
This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog. The Euro closed up Friday`s session at 136.13, and looks poised to make a run up to test the 140 level in February. I, among many, was thinking the Euro would next test the 125 level, and things started heading well in that direction with the Euro moving down to 129, and appearing on a downward slope. So what happened? Well, there have been quite a few new developments that prompted this reversal of the euro fortune. PIIGS Bond Sale Surprise Furthermore, China and Japan had both publicly stated that they would be buyers of these risky European Country Bonds. So any shorts expecting a European collapse because of these much anticipated bond auctions failing miserably had to cover fast when the opposite occurred. A Hawkish ECB This really illustrated the difference between ECB and the U.S. Fed–ECB`s sole mandate being to ward off inflationary pressures, versus the FED`s dual mandates of monetary policy being governed by unemployment levels and inflation concerns. … And A Dovish Fed If you listen to all the language coming out of the Fed minutes, they have always stated that rates are going to be left extraordinarily low for an extended period of time. This type of phrasing has left many analysts with the opinion that the unemployment level would have to get somewhere near the 6.5% levels before Bernanke would even consider raising rates. With a major election coming up in 2012, the focus of the Obama administration and everybody else trying to get re-elected will be lowering the unemployment rate at all costs, even if we have to stomach a little inflation along the way. So, about as hawkish as the Fed will be in 2011 towards inflation concerns is not initiating a QE3 campaign. So it is quite logical that between the two central banks, ECB will most likely be the first to raise rates, and by far the more hawkish when it comes to monetary policy over the next two years. Hot Money Flowing To Europe After emerging markets had stellar returns in 2010 with the likes of Singapore and South Korea, it appears that the fund managers are moving some of their money into Europe with the belief that because of the over-hyped debt concerns of 2010, that European assets are currently undervalued and at a discount to emerging market assets. Hot money coming into Europe is extremely bullish for the Euro. Germany’s Really Kicking Spain Cleaning The Banking House This is the type of proactive governmental response that was lacking in 2010, which was always behind the curve, and only pushed into action by market forces. The fact that European leaders are learning their lesson and trying to get ahead of the bond vigilantes in 2011, which manifests itself in lower financing rates, is very encouraging and bullish for the Euro as well. Euro United Bonds We Stand
Dennis Gartman, writer of “The Gartman Letter“, discusses the Eurozone crisis and says he still expects the euro to split into two currencies. (Gartman comes on at about two minutes into the clip.) Source: CNBC, January 10, 2011.
This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog. For the most part of 2010, the typical image of Europe—one of cultural sophistication—has been replaced by widespread riots, burning cars, large scale strikes over labor reform and unemployment resulting from austerity measures amid a sovereign debt crisis in the region. Gold Chart’s European Tale Fear about defaults and more bailouts throughout the European Union (UN) has formed a dark storm cloud hanging over the otherwise robust global rally, and pushed Gold to an all-time high of $1,432.50 an ounce on Dec. 7. The market’s emotion related to the European debt crisis is clearly reflected through the interaction between Dollar, Euro and Gold, where you can literally trace the timeline of significant macroeconomic events in Europe and the United States (See Chart).
The general pattern is simple – Whenever there’s bad news out of Europe, investors first course of action is to dump Euro and go into gold and dollar as the two top safe haven choices…. and vice versa. Conventional Wisdom Rewritten However, the conventional wisdom has been totally rewritten by the global financial crisis, the European debt crisis, and the unprecedented and synchronized global quantitative easing. As horrendous as the U.S. budget deficit and debt situation is, compared with the depth and breadth of European debt woes, investors now see euro as the risky currency, while dollar has regained its safe haven status as Gold. China In The Gold House At current price levels, the main gold buying action will come from investors and funds as inflation and currency hedge as well as price speculation, instead of from jewelry demand. From that perspective, there’s a fourth major player, in the name of China, emerging in the global gold market. Bullion Vault noted that with savings-deposit rates now more than 2% below the rate of consumer-price inflation, China has fast become the world’s No.2 source of physical gold demand. In fact, China recently revealed that its gold imports rose almost 500% year-over-year to 209 tons during the first ten months of this year. Continue reading Four to tango in 2011: Gold, dollar, euro & China  By Prieur du Plessis, on December 30th, 2010 posted in: Economy, Euro, Guest Bloggers  One comment so far
This article is a guest contribution by Dr Stefan de Vylder*, well-known Swedish economist. The 85 billion euros that were recently mobilised by the IMF, the European Union and various bilateral lenders to save Ireland – or, rather, to save banks and other private investors who have invested in Irish assets – confirms my view of the European Monetary Union (EMU) as a club with the wrong membership and a weak management. Early in 2010, Greece was the ideal scapegoat. A huge fiscal deficit which previous governments had tried to cover up with the help of creative bookkeeping and outright cheating provided a reason for the vilification of Greece. But it was membership in the currency union that had made it possible for Greece – and, indeed, for all members of the union – to benefit temporarily from a rising euro and easy access to cheap credit. Neither the financial markets, nor the European Central Bank (ECB) or other EU authorities, were vigilant enough to warn of the danger of the growing bubbles and deficits that came to characterise a large number of the euro zone countries. Yesterday Greece, today Ireland, tomorrow Portugal and Spain, the day after tomorrow perhaps Italy and France. A large part of the EU is in severe financial trouble and the recipient of punitive loans with adverse policy conditions attached. These are the prospects for an association that was formed with supposedly binding rules for responsible behaviour. The cornerstone of the EMU was the so-called Growth and Stability pact, which stated that no member of the club was allowed to run a fiscal deficit exceeding three per cent of GDP. When Germany and France soon after the formation of the EMU broke this golden rule the stability pact was de facto buried. At present, the average size of the euro zone’s fiscal deficit is 6,5 per cent of GDP. The next rule that was violated, and proved to be fiction last spring, was the “no bailout” clause in the Lisbon Treaty, which explicitly forbids the EU to rescue countries in crisis. Furthermore, the 110 billion package to Greece was, as was the case in the recent deal with Ireland, tied to the implementation of austerity policies that were so severe that even the IMF expressed its concern. The loan conditions to Greece and Ireland are very tough. But the EU and IMF message could also be interpreted in the following way by countries in crisis: if you promise to reduce your deficits you may borrow enough euros to be spared. For the time being. The third pillar of responsible behaviour was the European Central Bank, which was forbidden to bail out member countries in crisis by buying their government bonds. Today ECB is the largest – and soon, perhaps the only – together with China – single buyer of Greek and Irish bonds. The sellers are those private investors who with a sigh of relief are happy to find someone willing to buy their high-risk assets. These rescue operations suffer from one major weakness: they fail to solve the main problems of the euro zone, which are rather likely to be aggravated. Insolvency, not Illiquidity The EU leaders are amazingly silent on the grave predicament the EMU is now in. Simply put, those EU countries unable to service their debts will not be helped by taking up new loans, especially not if these loans are given at exorbitantly high interest rates. Click here for the full article. Source: Dr Stefan de Vylder, December 29, 2010. By Prieur du Plessis, on November 30th, 2010 posted in: Euro, Europe 2 people had their say - chime in!
The Euro is coming down against the dollar “based on the fact that the economy in the U.S. is much stronger than in Europe,” Charles Nenner of Charles Nenner Research told CNBC. |
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