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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.

  • jack

    Follow the logic.

    Europe creates a fund to finance the profligate indigent. Who provides the funding? Well, a few thrifty countries such as Germany. And a few relatively, and I do mean relatively, better off countries such as France. And some profligate and potentially soon to be indigent countries like Portugal, Spain and Italy. The latter are folks the new fund is meant to firewall. Where is this latter group finding the funds to place in the fund? Somewhat circular is it not?

    Then, just to confuse those wondering about how it all works, add in the twist of another fund. Let’s call it the IMF. Who provides the funds for that? Well, the burden is shared by many other countries, some relatively strong. But it is also funded by a whole bunch of weak countries such as, you got it, Italy, Spain, etc. Further consider that the announced IMF commitment is Euro 250 billion. Last I looked, the IMF’s potential capital to use is $250 billion and even with the Euro racing to parity, the commitment is still larger than the available capital. Oh, and consider one more thing. The ‘subscriptions’ last I knew were not all paid in. So the IMF which does not currently have the total capital in hand commits an amount in excess of authorized capital to just one situation? I wonder how Latvia and Hungary will feel about that?

    Only a politician could come up with this type of logic and expect the markets to buy it. Given Germany and Benelux can’t fund the whole thing, then what this comes down to is whether the ECB will carry forth and monetize the whole damn thing. That is unless Hans and Heidi decide they made the worst currency trade in modern history and revert to the Dmark while the Greeks perfect the art of Molotov cocktails.

    Oh, and Larry, I started to comment via my IE browser, but the comment section is not formatted within the white space. I had to switch to Firefox to get this posted.

    • LD

      Jack,

      Thanks for highlighting the circuitous and ridiculous structure of the bailout. The markets have voted by pounding the Euro after the knee jerk reaction.

      For some reason, there have been compatibility issues with Internet Explorer (check out this post for more information). Thanks for changing to Firefox so you could add these insights.

  • Jack

    Gosh, somebody forgot to tell Strauss-Kahn about the size of the commitment the IMF was making.

    http://www.imf.org/external/np/sec/pr/2010/pr10188.htm

  • Sean

    LD,

    What currency(s) do you think will replace the EUR in the basket the USD is indexed against when the EUR no longer exists later this year?

    • LD

      I take it you’re being serious although some of our European friends may not appreciate the question.

      The Euro certainly does run the risk of becoming marginalized as selected nations drop out of the EU.

      I am not enough of a currency expert to venture a guess as to which currency may replace.

      Perhaps an emerging market currency.

      • Sean

        The EUR is currently the most heavily-weighted currency in the USD-index; investors & speculators should not be too bullish on the USD longer-term because when the EUR is replaced in the index later-this-year, it could very-well be a strengthening currency that it’s replaced-with which could cause the USD to plummet, just-like the EUR is currently doing.

        • LD

          Sean,

          Great point. I think the dollar is benefiting now only because it is a safe parking space but the fact is the debts and Fed’s printing press will bring the dollar down at some point as well.

          The administration does not want the dollar to strengthen and inhibit our trade.

          Beggar Thy Neighbor






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