Forex News: EUR still plunging over Greek bailout negotiations

Monday, April 26, 2010

“Europe and the members of the euro zone, are committed to a common currency and will defend it at any cost,” Greece’s Finance Minister George Papaconstantinou told reporters yesterday in Washington, following his meeting with the International Monetary Fund and World Bank. According to the Greek Prime Minister, Europe’s response to the Greek fiscal crisis shows that the bloc will do whatever is necessary to protect its unilateral currency.

Greece is currently negotiating the terms of a bailout worth as much as €45 billion this year as investors continue to doubt that that the tiny Mediterranean nation can finance itself after its budget deficit totaled 13.6% of gross domestic product last year. With Greece facing €8.5 billion of bonds maturing May 19, finance ministers are seeking a swift resolution of the talks.

Last Thursday, the Euro plunged to a new one year low of $1.32574 after a EuroStat report that Greece's budget deficit was larger than previously thought. Greece called for activation of the joint EU-IMF €45 billion ($60 billion) bailout fund this year in an unprecedented test of the Euro’s stability and European political cohesion. The appeal for help from the European Union and International Monetary Fund follows a rapid rise in borrowing costs to what Greek Prime Minister George Papandreou called unsustainable levels that would ruin all efforts to cut the budget deficit that is more than four times the EU limit. Greece’s request of the bailout fund comes one day after the yield on the country’s benchmark two-year note topped 11%, approaching that of Pakistan, and Moody’s Investors Service lowered Greece’s creditworthiness by one notch to A3, saying it was considering further cuts.

On Friday, the single currency managed to rally against the US Dollar, as German business confidence rose more than expected to hit a two year high in April. The Germany Ifo Climate, a survey based on 7,000 executives, jumped from a revised 98.2 to 101.6 (the market had expected 98.2) as the global economic recovery boosted export demand and warmer weather allowed workers back onto construction sites. The Euro's 12% drop in the past five months has made German exports more competitive outside the currency bloc and as a result, German manufacturing is expanding at a record pace. Moreover the arrival of spring weather has significantly boosted building activity and consumer spending.

Following the release of the better than expected report, the euro rose to trade at $1.3335 (at 11 a.m. in Frankfurt), up from 1.3230 that morning. Unfortunately, the Euro was unable to fully recover from Thursday's detrimental losses and fell for a second week in a row to close at $1.33837, up 0.88% from the day’s opening price but down 0.78% from the week’s opening price.

In the Asian forex online trading session this morning, the EUR/USD gained some ground as the pair hit a high of 1.33961. Analysts, predict that Euro will continue to fluctuate this week as investors await a solid plan on a financial lifeline for debt-stricken Greece. Later today, the European Central Bank president, Jean-Claude Trichet will speak (1730GMT).

Across the Channel, the U.K economy grew half as much as expected in the first quarter of this year, highlighting that Britain still continues to struggle with its recovery. Britain's Prelim GDP report showed a 0.2% increase from the last quarter of 2009, when a 0.4% expansion pushed Britain out of the recession. The pound tumbled 0.4% to $1.5318 following the report, from $1.5397. The British currency managed to recovery against its U.S counterpart, to close the week at $1.53749, up 0.05% from the day’s opening price. The EUR/USD closed at 0.87027, down 0.82% from the day’s opening price of 0.86318.

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