Euro: There’s been a shift in the ugly contest between the dollar and euro. The euro had remained above $1.40 until last week, a fifth more than the $1.17 at which it was launched and two-thirds above its lows of a decade ago. But, its loss of five dollar cents in a matter of days, to $1.36, may well be a prelude to a steeper fall as many factors turn against it: renewed fears about the euro debt crisis, interest rate prospects, technical trading factors and economic growth concerns.
First, German and euro zone growth dropped to just 0.2 per cent in the second quarter. The US economy is weak, too, but monthly surveys suggest it is holding up better. The risk of a euro zone recession is high, as major economies such as Italy and France are forced towards even more fiscal tightening. The US, on the other hand, is mulling a growth-boosting plan. This may spare the Federal Reserve another round of quantitative easing that would have weakened the dollar further.
Second, fast-slowing euro zone growth has put an end to ECB’s rate hikes. It may even be possible that rate cuts may come at some point, eroding the euro’s rate advantage over the dollar. At least, the euro’s fall will alleviate the pain of the region’s exporters.
Third, a technical appraisal may also make traders euro-wary. Its recent fall means the currency has dropped below its 200-day moving average against the dollar. Many traders will see this as a sell signal.
However, the fourth and biggest threat hanging over the euro is the worsening of the debt crisis. Germany wavering on its commitment to the Greek bailouts would erode confidence in the currency. So, naturally, would a disorderly default, not to mention a Greek exit from the euro zone. It may not be that bad for now. Greece may get another tranche, gaining the euro zone some time. But, unless the zone finds answers for its periphery crisis, the currency’s new trend will be down.