Euro Falls Again as Greece Finances Deteriorate Further

Posted January 20, 2010

The euro weakened against most global currencies as the Euro-Zone faces its first real test over member nation finances. New Zealand’s currency weakened as consumer prices fell. The Canadian dollar fell after the Bank of Canada votes to keep interest rates at the current historic low. The Mexican peso is considered to be undervalued. The Brazil real weakened in response to China’s monetary policy tightening. The UK pound strengthened against the euro and US dollar.

 

The euro weakened to a five month low as the true financial condition of Greece unfolds. Greece has a large budget deficit that is widening and debt it is unable to repay. This is the first country to have finances that are testing the Euro-Zone’s ability to enforce member rules concerning deficits and debt. It has become clear that Greece’s financial problems will not be solved easily and a long term plan that makes true progress towards deficit reduction needs to be developed. The first 3-year plan submitted by Greece appears to be based on faulty data that makes the financial information look better than it is in fact.

The euro weakened to $1.4167 against the US dollar. In fact, the euro fell against most major global currencies. It fell against the yen to 129.49 yen and against the Australian dollar to 64.79 Aussie cents.

In New Zealand, consumer prices fell leading to a weakening dollar. The New Zealand dollar fell to 72.82 US cents. The current benchmark interest rate is set at 2.5 percent and is expected to be held at that rate through at least the middle of this year and possibly later.

The Bank of Canada policy makers met and voted to keep the benchmark interest rate at .25 percent. The Canadian dollar, nicknamed the loonie, weakened to C$1.0306 against the US dollar as the strong dollar limits the pace of economic recovery.

The Canadian dollar has been strengthening as commodity prices rise. Oil prices have risen to $78.95 a barrel for February delivery.

The Mexican peso is seen as being currently undervalued which means it offers an upside for investors as the recovery progresses. With the US economy slowly healing, the Mexican economy is sure to follow suit. The peso is currently at 12.64 pesos per dollar and some analysts predict it will fall further before recovering.  Other experts expect the peso to strengthen from its current value as the US economy recovery advances. The peso has risen 3.6 percent in 2010.

Mexico is Latin America’s second largest economy, but its economic health is closely tied to the US economy. Approximately 80 percent of all Mexican exports are sent to the US. One of Mexico’s main exports is oil and the rise in crude oil prices is benefiting the country’s finances.

The Brazil real weakened as China begins to tighten monetary policy as part of the country’s stimulus withdrawal plans. China is reining in loan growth to prevent asset value bubbles. This is expected to have a negative effect on Brazil’s exports.

The Brazil real weakened .9 percent yesterday to 1.7794 reais per US dollar. 

The UK pound strengthened against the euro to 87.15 pence per euro. The country’s consumer prices have unexpectedly started to rise rapidly meaning the loose monetary policies will have to be tightening sooner than planned.

 

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