Monday, February 8, 2010

European sovereign debt problem

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The euro to US dollar exchange rates is trading in a narrow range of about 1.3620 to 1.3720 since late Friday, having dropped during the US session on Friday from 1.3742 to 1.3582, an 8-month low. The euro exchange rate came back later in the day in the usual end-of-week position paring, albeit a modest one this time.

The WSJ reports that "The cost of insuring Greek and Spanish debt against default fell amid a lack of fresh bad news Monday. However, the debt problems of Greece, as well as those of Spain and Portugal, are expected to remain a dominant feature in currency markets. Last Friday's vote by Portugal to extend the spending powers of its regional councils aren't going to help either as this will make it more difficult for Lisbon to curb the country's budget deficit."

During Asian hours, the failure of G7 to say anything interesting or worthwhile did not escape the notice of traders. G7 is so far down the news list that you have to search hard to find out what they did say. The group did not talk about the European sovereign debt problem, although EU officials made some comments on the sidelines, and although Japan wanted to talk about China, the rest of G7 chickened out. G7 gutlessness pushed Asian stock markets mostly lower, although the dollar/yen is flat as pancake in a tiny range of 89.10 to 89.56.

The US dollar index made a giant leap last week, from 78.68 on Feb 3 to 80.68 on Friday. See the chart. It probably went too far and too fast last week. We know prices don’t move in a straight line so we must expect a pullback at some point, but after that, the index has the potential to reach the 50% retracement level at 81.86 in Feb or March.

Bye for Now
Barbara Rockefeller
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CrisisMaven said...

In and of itself a Greek bankruptcy or bond default should -in theory- not affect the Euro as such very much, Greece being maybe 3% of the total. However, just as a Californian bankruptcy would reflect badly on the "state of the Union" as a whole so would the default of on EU country, coupled with the rising interest rates and thus further destabilisation of the remaining over-leveraged member states, make investors wonder when sovereign default across the board is likely. Thus they wouldn't commit themseves to bonds of longer maturity and that's the beginning of the end.

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