Just in case you haven’t read a new story or watched a news broadcast in the past week, let’s get you caught up. Early last week, the euro took a hit after Italy got a major credit rating downgrade- this sent the euro down against all other currencies. The euro then gained slightly against the dollar after news from the Fed showed that the U.S. would likely seek further stimulus funds. Then, comments about the euro zone by German’s Chancellor Merkel caused a major downturn as traders were spooked by the negative remarks concerning the future of the European economy. To close out Friday and open Monday, news that Spain’s Valencia region is seeking help from the central government to repay its debt tanked the euro. The cuts by the Spanish government of its own forecast put more pressure on the euro and the revised estimate indicate no foreseeable stability and traders are taking note.
So here it is, early in the week and more worries are causing the euro to struggle- investors are still reeling about the recent news about the Spanish economy, the cut to the Italian credit rating, and now worries over the state of the Greek economy are mounting.
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Fears Spain will have to seek a full sovereign bailout, coupled with mounting worries that Greece may leave the euro, sent the euro sliding to a two-year low against the dollar and a near 12-year trough against the yen on Monday.
Spanish bonds yields soared to their highest levels since the euro was created, despite euro zone finance ministers approving on Friday terms for a loan of up to 100 billion euros for Madrid to recapitalise its banks. Analysts said this was the prime driver of the euro’s fall.
Murcia became the second Spanish region to request financial assistance from the government, after Valencia, with media reports suggesting six regions could seek aid.
“What began as a Spanish banking bailout looks to be moving rather quickly towards a possible sovereign bailout. Overlay that with increasingly negative news on Greece and you get a fairly negative mix, so the path of least resistance for the euro is down,” said Jeremy Stretch, currency strategist at CIBC.
The euro fell to $1.20821, its weakest since June 2010 and creeping ever closer to the 2010 low of $1.1876.
After closing at $1.2163 in New York on Friday, it “gapped” lower to open at $1.2123 in Asia on Monday morning, signifying the market perceived the value of the euro had dropped over the weekend in response to events in the euro zone.
Against the yen it dropped more than 1 percent on the day to 94.23 yen, a level not seen since late 2000.
The euro tumbled not just against safe havens like the dollar and the yen but also against currencies which usually fall in times of heightened risk aversion in financial markets.
It hit a record low versus the Australian dollar, a more than 3-1/2 year low against sterling and a 9-1/2 year low versus the Norwegian crown.
GREECE WORRIES
The prognosis for Greece also appeared to darken, only adding to the reasons for investors to sell the euro. German magazine “Der Spiegel” reported on Sunday that the International Monetary Fund may not take part in any additional financing for Greece, highlighting growing frustration with Athens.
Speaking two days before a team of international lenders arrive in Athens to push for further spending cuts in return for more rescue payments, Prime Minister Antonis Samaras said Greece was in a “Great Depression” similar to the United States in the 1930s.
Looking ahead, analysts said any weakness in euro zone provisional purchasing managers’ surveys on manufacturing and services sector activity due on Tuesday would only add to the gloom and intensify selling pressure on the euro.
Latest IMM positioning data showed bets against the euro increased further in the week ending July 17 — indicating it could be vulnerable to a squeeze higher — but strategists said the single currency would struggle to rebound given the steady flow of bad news.
“Flows that were working their way their way into the core are now looking to be increasingly leaving the euro zone altogether,” said Ian Stannard, head of European FX strategy at Morgan Stanley. “If it’s a portfolio shift which is driving the market rather than speculative flows then the extreme reading on positioning data will persist.”
With risk aversion back on the rise, the safe-haven U.S. dollar and yen found good support. The dollar index jumped 0.4 percent to a two-year high of 83.835 and the dollar also hit a 19-month high against the Swiss franc.
The yen was the biggest gainer, rising to a seven-week high of 77.94 yen per dollar.
Japan’s Vice Finance Minister for international affairs was reported as saying the country will not exclude any options when responding to excessive currency moves, although market players said the authorities were unlikely to consider intervening while dollar held above 76 yen.
The euro fell against the Australian dollar to around A$1.1690 and hit a trough of 77.56 pence against sterling.
But the Australian currency fell sharply against the dollar and was last down 0.8 percent at $1.0288, with traders saying worries about slower Chinese growth only added to investor risk aversion.
On Monday the euro hit a new two year low against the dollar and an almost 12 year low against the yen- it also broke records in lows against the Aussie dollar. The poor state of the euro is a result of the previous unsettling news plus the addition of new worries about the possibility of a Greece exit of the currency.
Spanish bond yields are soaring to the highest levels ever as the region requested a second round of aid from the government.
Given the depressed state of the euro zone, Greece is likely to back out of the euro as the area is in a great depression of their own.
Do you think the rest of the week will continue on the same path of downfall for the euro?
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