Wednesday marks day number three in the fall of the euro- this is a result of the mounting concerns that the EU summit will produce little progress in the direction of a solution for the European debt crisis. After hitting a two week low then leveling off a bit, experts are warning that more losses are most likely inevitable for the near future. The European Union summit is expected to be a complete failure in the way of coming to a solution for Europe’s mounting debt crisis.
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No move toward the issuance of common euro zone bonds
appeared likely after German Chancellor Angela Merkel was quoted
as saying Europe would not share total debt liability “as long
as I live”.
German leaders have deflated expectations of any
breakthrough from the two-day summit which starts on Thursday,
but investors are reluctant to sell the euro aggressively in
case any progress in tackling the debt crisis is made. Another
factor checking the euro’s losses is the fact that speculators
already have large bearish bets against the common currency.
“Merkel continues to paint the newswires with her thoughts
on the EU way forward as the Eurobond concept does not appeal to
her still and the EU blueprint seems a little off in her eyes,”
said Brad Bechtel, managing director at Faros Trading in
Stamford, Connecticut. “I don’t think we will get anything
substantive out of the EU summit and neither does the market
after having been told as much over the past several days by EU
officials.”
The euro was last down 0.1 percent at $1.2473, though
off a two-week low of $1.2440 hit on Tuesday, using Reuters
data, a level seen as providing strong technical support. The
next downside target is a two-year low of $1.2288 hit on June 1.
Some traders said a roadmap toward a common banking union or
a decision at the summit to activate the euro zone’s rescue fund
to start buying Italian and Spanish government debt and lower
their borrowing costs could provide relief to the euro.
Italy’s six-month borrowing costs rose to 2.957 percent at
auction on Wednesday, their highest since December. The spike
comes just ahead of a five- and 10-year debt sale for up to 5.5
billion euros on Thursday. On Tuesday, Spain saw its short-term
borrowing costs nearly triple.
Growing concerns that more peripheral euro zone nations will
be shut out from capital markets and expectations that fiscal
austerity will drag the region into a more painful recession
will see the euro stay under pressure. Any bounce toward the
$1.27 or $1.28 level would attract sellers, traders said.
“I am going short euro/dollar into the summit,” said Stuart
Frost, head of absolute returns and currency at RWC Capital, a
London-based fund manager. “The euro should be a lot lower than
what it is and even if there is an agreement, chances of which
are very low, the currency is headed towards $1.20.”
A Nomura survey showed a majority of investors expect the
summit to produce no concrete measures. Twenty-two percent
expected “a bailout announcement of sorts” while 14 percent were
looking for “a resolution towards banking union”, reflecting an
outside chance of a breakthrough.
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Not that anyone following the forex market lately should be surprised, but the euro is down- again. This is a pattern that has continued since mid-last week, and is likely to continue. Experts believe that another big dip is coming, but for now, investors are holding fire ahead of the EU summit.
After hitting a two week low on Wednesday, the euro seemed to level off some against the U.S. dollar- the dollar itself wasn’t fairing so well a few weeks ago until the Fed announced the extension of the Twist program. The euro is flat for now, but that’s expected to change rapidly in the wake of very low expectations for the European Union summit- experts expect basically nothing out of the meeting in the areas of progress to reduce the debt crisis of the region.
Quick moves of the issuance of common euro zone bonds are not likely, and investors are hesitant to sell the euro too aggressively before the two day summit- the EU summit begins today. The euro also came under pressure by a rise in Spanish bond yields. It’s not all bad news for the euro as it regained some lost ground against the yen- rising 0.2 percent to 99.50 yen.
What do you expect out of the late week forex market and the status of the euro? Are you at all surprised that the euro leveled off? Could this move be temporary?
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