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The Euro Is Retreating like Napoleon from Moscow

Posted by Larry Doyle on May 11, 2010 12:28 PM |

If those involved in the European bailout thought the trillion dollar package would quickly support the Euro and, in turn, the economies of the EU, well guess what? After a quick, short covering rally for the Euro yesterday, the common currency for the EU has turned tail and is retreating faster than Napoleon from Moscow.

The Wall Street Journal addresses the Euro’s retreat in writing, Euro Falls as Aid-Plan Euphoria Fades:

Unnerved by the euro zone’s giant bailout mechanism and the prospect of patchwork politics in the U.K., investors herded back into the safety of the dollar and yen Tuesday, sending the euro and the pound lower.

Currencies sensitive to economic growth or commodity prices, such as the Australian dollar and Brazilian real, also lost ground as speculation resurfaced about a revaluation of the Chinese yuan. A stronger yuan and tighter monetary policy are seen as likely to slow China’s economic growth, hurting demand for exports from ountries like Australia and Brazil.

The nearly $1 trillion emergency funding package from the European Union and the International Monetary Fund announced Sunday appeared to have failed to convince investors that the sovereign-debt crisis is over. Currencies which had rallied Monday against the dollar and yen on the initial burst of enthusiasm over the package gave back their gains overnight.

“[The package] buys a couple of years but it doesn’t address the long-term sovereignty issues,” said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn. “It’s not a game-changer; it’s a time-out.”

“Clearly, the sovereign-debt crisis is not going to be resoved any time quickly, and the U.K. political wrangling looks set to continue for some time as well,” said John McCarthy, manager of currency trading at ING Capital Markets in New York. “We’re in for a period of high volatility.”

If you want to see what a financial retreat looks like, check the swan dive of the Euro from the 1.30/dollar level yesterday to its current level of 1.27/dollar. A trillion dollar bailout is a big number, but it appears that plenty of investors, who believe the issues within the EU are not going away anytime soon, are willing to sell the Euro.

WSJ chart of Euro for last 10 days on an hourly basis.

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