Early last week, the Euro was on a surprising rise. Experts expected a fall by the end of the week, and it came- perhaps a little heavier than anyone expected. Many countries in Europe are undergoing changes and financial woes, and the threat of a Euro zone recession may cause the Euro to drop even further.
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- Euro retreats after Spanish rating downgrade
- Weak Italian, German economic data adds to gloom
- Lack of policy action from Fed hits riskier currencies
- Spain expected to request aid package at weekend: sources
NEW YORK, June 8 (Reuters) – The euro slid on Friday after a three-notch downgrade to Spain’s credit rating and signs of economic weakness in Italy and Germany, leaving it vulnerable as concerns increase that the euro zone debt crisis is getting worse.
European Union and German sources told Reuters Spain was expected to make a request over the weekend for an aid package to prop up its troubled banks, highlighting the vulnerability of the country’s financial sector.
Rating agency Fitch slashed Spain’s credit rating on Thursday, leaving it just two notches short of junk status. It signaled further downgrades could come as the country tries to restructure its troubled banking system.
“There has been little to soothe uncertainty and central bank action this week failed to remove tail risk,” said Camilla Sutton, senior currency strategist at Scotia Capital in Toronto. “News flow remains relatively negative.”
The euro fell 0.8 percent to a low of $1.2462, retreating from a two-week high of $1.2625 hit on Thursday after a surprise interest rate cut by the Chinese central bank.
More losses would leave the euro vulnerable to a test of the 23-month low of $1.2286 hit on June 1, using Reuters data, after failing to break above chart resistance at $1.2623, the January low.
The euro also took a knock after Italian industrial production fell far more than expected in April and German imports tumbled at their fastest rate in two years, adding to euro zone recession concerns.
The euro briefly came off its lows after China said it would cut fuel prices by nearly 6 percent from Saturday, which some traders saw as another positive step that may help stimulate China’s economy.
But some analysts were concerned that by cutting rates on Thursday China might have been looking to pre-empt grim news from Chinese data due out over the weekend.
“The news with the easing measures in China would normally be positive for risk assets but the market is cautious,” said Ian Stannard, currency strategist at Morgan Stanley in London.
“Below $1.2290 would leave $1.20/$1.19 in view, but the euro could get some positive surprises on the way that could lead it back up to the $1.26/$1.27 area.”
EURO WORRIES
Many analysts said the euro could come under further pressure next week as attention refocuses on political turmoil in Greece before an election on June 17. A victory for anti-bailout parties would raise the possibility of Greece leaving the currency union.
The euro fell 1.1 percent against the yen to 98.93 yen. The safe-haven Japanese currency gained broadly as market sentiment declined, with the dollar losing 0.3 percent to 79.37 yen.
Currencies with more perceived risk were also under pressure after U.S. Federal Reserve Chairman Ben Bernanke offered no hints of imminent monetary stimulus in his testimony to Congress on Thursday, wrongfooting some market players who had positioned for a dovish statement.
“The recovery (in the euro) we saw in the last few days was not a sustainable one,” said Lutz Karpowitz, currency strategist at Commerzbank, who forecast the euro would be around $1.20 by the end of June.
The higher-yielding Australian dollar slipped 0.5 percent against the U.S. currency to US$0.9850.
Thomson Reuters released its monthly foreign exchange trading volumes for May 2012 on Friday. May average daily volume was $154 billion up from $130 billion in April but down from the $161 billion reported in May, 2011.
Early last week, the worth of the Euro raised despite mounting fears about the debt in Spain, and the prospect of a bailout for the banks- as the week closed, the opposite happened. On Friday, the Euro slid after a downgrade on Spain’s credit rating- it was actually pushed down three-notches. Think of how it felt in America after we lost an “A” off our AAA credit rating last year- only three times as worse.
Another factor contributing to the falling value of the Euro is the weakening economy in Germany and Italy- leaving the overall economic outlook in Europe vulnerable. A request for an aid package from Spain is expected in the very near future. The aid package request will likely involve help for Spain’s troubled banks.
Spain’s credit rating took such a big hit on Thursday that it’s only a few levels above junk now. The slash was as result of an assessment by the rating agency, Fitch. Further downgrades are not at all out of the question- actually, they seem more than likely while the country struggles to restructure its economy.
After a two week high, the Euro fell to a low of $1.2462- down .8% since early last week.
Another troubling factor to the Euro was a fall in the Italian industrial production industry and German imports decreased rapidly- factors only adding to worries about a European recession.
Throughout this week, we can expect to see further pressures on the Euro as the heated election in Greece is coming up in the middle of June. The outcome of the election could mean a victory for anti-bailout politicians- a move that would leave Greece as a currency union.
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