The story of the falling euro is ongoing and layered- as predicted, the euro is not doing so well after the meeting we talked about yesterday (the one of the finance ministry) did not show progress. After hitting a two year low on Friday and then holding shaky ground earlier in the week, the euro hit a five year low against the yen after a meeting of the euro zone finance ministers produced no results, as predicted by experts. Now, there is a German constitutional hearing on everyone’s radar sparked from a complaint about the ratification of the euro zone rescue fund and implementation of tough new budget rules. This week is also not faring well for the Aussie dollar as it is sagging on Chinese import data.
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The euro was weak near a two-year trough against the dollar and hit a five-week low versus the yen on Tuesday after a meeting of euro zone finance ministers offered no positive surprises, with sentiment edgy as the focus shifted to a German court hearing.
Euro zone ministers agreed to grant Spain an extra year, until 2014, to reach its deficit reduction targets in exchange for further budget savings and set the parameters of an aid package for the country’s ailing banks.
But they made no apparent progress on activating the bloc’s rescue funds to intervene in bond markets to bring down spiraling borrowing costs for Spain and Italy.
Meanwhile, Germany’s constitutional court is scheduled to hear on Tuesday a complaint about the ratification of the euro zone rescue fund and implementation of tough new budget rules.
Markets are hoping for a quick verdict but some analysts said a decision could potentially take a few weeks, keeping Europe on tenterhooks and possibly adding to bearish sentiment towards the euro. The court is not known to be pro-Europe and an adverse verdict could hurt integration plans.
The euro fell 0.3 percent to $1.2280, edging back in the direction of a two-year low of $1.2225 hit the previous day on trading platform EBS. It also fell to a five-week low of 97.32 yen on the EBS platform.
“We have a German court hearing today and while we do not expect them to overturn the legislation, they could give more oversight to the parliament, which will increase the red tape around the euro zone bailout fund,” said Melinda Burgess, currency strategist, at RBS.
“That will mean more uncertainty and more weakness for the euro. We are comfortable with our short euro position.”
The euro has taken a hit after the European Central Bank cut interest rates last week, while a renewed rise in Spanish bond yields suggests there has been little let-up in investor concern over Spain’s fiscal health or the wider euro zone debt crisis.
Spanish 10-year bond yields have risen back above the critical 7 percent level seen as unsustainable in the long-term.
With Spanish and Italian bond yields at elevated levels, the euro is expected to remain under pressure despite developments at the Ecofin meeting. Analysts said the political hurdles on how to use the euro zone’s rescue fund and prevent further contagion remained very high.
“I think we have a long way to go before we reach the stage at which policymakers will be ready to act, particularly as it relates to potential bond purchases in the secondary market,” said Todd Elmer, currency strategist for Citi in Singapore.
Market expectations for the euro zone finance ministers’ meeting had not been high to begin with, but the outcome highlights a seeming lack of urgency on the part of policymakers, Elmer said.
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The euro has had a rough trip over the past month, and its troubles heightened at the end of last week. After reaching a two year low against the U.S. dollar it saw a temporary hold, which was a much welcomed break from the free fall, and then against started to drop mid-week. A meeting of the euro zone finance ministers was met with negative speculation and a lack luster outcome, something that was predicted to cause the euro to fall further. The expert’s speculation was right and the meeting turned out to be a flop- little was done to ease the euro zone debit crisis.
The euro zone finance ministers made little progress during their meeting earlier in the week, but did agree to give Spain two more years to reach deficit reduction targets in return for further budget savings and regulations on an aid package.
Germany has a constitutional court hearing to address a complaint about the euro zone rescue fund and it’s implantation of strict new budget rules. Onlookers are hoping for a quick verdict, but a decision could take a few weeks- an action that will have a profound impact on the financial markets. .
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