It has been nothing but trouble for the euro over the past month and a half, and we only have more bad news to report. Two weeks ago, the euro reached a two year low against the dollar and stayed in that position for most of last week. Once the euro finally did stabilize a little against the U.S. dollar, it lost value against other major currencies- which appears to be the case at the beginning of this week as well as the euro continues to ease against the dollar but is not fairing so well otherwise. The euro also hit a new three and a half year low versus sterling. Even the stability against the U.S. dollar could be temporary as the dollar’s drop is a result of the anticipation of the Fed chief’s upcoming testimony- this also brings the dollar to a new recent low against the yen. The euro is still under major pressure because of the ever growing European debt crisis that includes a recent downgrade to Italy’s credit and a possible new downgrade for the country on its way.
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The euro fell to a 3-1/2 year low against sterling, a six-week low against the yen and hovered close to a two-year low against the dollar.
Germany’s Constitutional Court said on Monday it would not rule until September 12 on whether the euro zone’s bailout fund, the European Stability Mechanism (ESM), and planned changes to the region’s budget rules are compatible with German law.
“This adds to the uncertainty about the ability of the euro zone officials to respond adequately to any potential further deterioration of the debt crisis. This is reflected in today’s market price action in euro crosses,” said Valentin Marinov, Director of FX Strategy at CitiFX.
A report suggesting a change in the European Central Bank’s stance on how some bondholders could be treated under Spain’s bank bailout added to pressure on the common currency.
The euro slipped 0.4 percent against the dollar to $1.2190, slightly above a two-year low of $1.2166 hit last week.
It fell to 78.41 pence against sterling, its weakest since late 2008, and to 96.20 yen, its lowest since June 1, and hit a record low against the Canadian dollar.
Investors have stepped up sales of the euro in favour of perceived safer currencies, disheartened by the lack of progress towards solving the bloc’s spiralling fiscal crisis.
A report in the Wall Street Journal said European Central Bank President Mario Draghi advocated imposing losses on holders of senior bonds issued by the worst hit Spanish savings banks.
The ECB declined to comment on the report, which said finance ministers rejected the advice due to concerns financial markets would react badly to such a decision.
“The euro is likely to remain on the defensive … If this report gains credibility that would be another reason to play the euro from the short side,” said Jeremy Stretch, currency strategist at CIBC.
Analysts said a vote on Thursday in the German parliament on Spanish bank aid was a further reason for caution.
German Chancellor Angela Merkel said on Sunday she was confident of backing from a majority of lawmakers, but analysts said unanimous support from her party was far from certain.
Spanish and Italian bond yields remained elevated as market confidence that the countries can finance their debts while reining in deficits ebbed.
BERNANKE AHEAD
But dollar gains could be limited if Fed Chairman Bernanke hints in testimony on Tuesday and Wednesday at the possibility of more quantitative easing to boost the U.S. economy.
“Euro/dollar could retest the lows, but pronounced downside from here may be difficult to sustain, especially ahead of Bernanke’s testimony,” CitiFX’s Marinov said.
“The balance of relative euro/dollar risks may be shifting … as investors who were willing to ignore the growing dollar negatives could start paying closer attention to them after the Bernanke’s testimony.”
However, analysts said the dollar would see a relief rally if Bernanke did not hint at more QE.
The dollar fell to a near four-week low against the Japanese yen of 78.91 yen, dropping below chart support at its 200-day moving average around 79.04 yen.
The Fed last month expanded efforts to keep long-term interest rates low by saying it would buy an additional $267 billion in long-dated bonds while selling short-term securities, but it held off from a third round of outright bond purchases.
Source
On Monday, the euro got even weaker as investors continue to grow more and more concerned about the timeline on the bailout funds to ease the troubles for the euro zone- traders are skeptical that the funds will be mobilizing any time soon. Further falling against the U.S. dollar was halted as the uncertainly of the upcoming testimony of chief Ben Bernanke of the U.S. Federal Reserve is making the dollar fall weaker. Although, the euro is still hovering around the two year low it reached a few weeks ago.
The euro did fall even further against sterling- reaching a 3-1/2 year low, and reached a six-week low against the yen.
This is partially due to the tensions over the constitutional hearing in Germany about the bailout funds- no ruling is set until mid-September.
Are you surprised that the U.S. dollar is starting out so poorly this week?
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