Euro Falls to Eight Month Low Against US Dollar

Posted February 08, 2010

The euro fell to an eight month low against the dollar in view of continuing debt problems in region’s member nations. The G-7 members agreed that economic stimulus plans must continue despite burgeoning budget deficits in order to prevent a double dip recession. The US dollar was stable against the Japanese yen. Mexico’s peso fell against the US dollar as investors lose appetite for emerging market currencies.

 

The past weekend was fairly quiet especially considering market drama seems to be a regular feature since the start of the recession. But there are many problems still lurking that could cause serious ripples in the currency markets unless the European Commission finds a way to help countries like Greece, Spain, and Portugal out of their quagmires of debt.

The euro has been steadily weakening and continued to do so through Sunday evening, 7-February-2010 New York time, reaching an eight month low against the US dollar. The euro weakened to $1.3647. It was at $1.3678 on Friday.

The euro also weakened against the Japanese yen to 121.84 yen.

The G-7 met over the weekend in Iqaluit, Canada and the focus for most members was the debt problems in the Euro-Zone. Japan’s representative was concerned about signs of a possible bubble in China. The unwinding of the recession is creating a whole new set of problems that must be addressed and often the solution lies in more money and not less. Normally monetary policies would be tightened at this point as economies begin to show signs of economic recovery, but the enormous budget deficits that have been created despite government assistance indicate tightening credit and money markets will only exacerbate the problems.

The G-7 finance chiefs generally agreed that continued economic stimulus measures are needed. As Canada’s Finance Minister, Jim Flaherty, told reports during a press conference, “We need to continue to deliver the stimulus to which we are mutually committed and begin looking at exit strategies to move to a more sustainable fiscal track.” In three words: loose monetary policy.

The Euro-Zone is facing a double dip recession unless the member nation economies begin to pick up their speed of recovery.  Greece does not want to borrow money and the G-7 seems to believe that Greece’s budget deficit reduction plan will be successful.

The euro is expected to continue weakening against the US dollar with no firm resolutions in sight yet as to how the debt burden in zone member nations will be handled. The sovereign credit risk is considered to be high despite assurances from the European Commission that Greece will not default on its debt.

Aggravating Greece’s woe is the start of a union 48-hour strike of tax collectors.

The US dollar was stable against the Japanese yen at 89.27 yen. Japan is grappling with the recall of millions of Toyota cars that need sticky accelerators replaced.

In the US, Treasury Secretary Timothy Geithner has publicly stated that the rising US budget deficit will begin to close as the economy recovers. He also reassured markets that the US is not in danger of losing its triple-A credit rating. The US budget deficit has reached a projected historic high of $1.6 trillion. The comment came about because last week Moody’s Investor Service issued a warning that bond ratings are at risk unless there are clear plans for deficit reduction over the next 10 year.

The Mexican peso fell against the US dollar to 13.095 pesos. The peso has experienced 3 weeks of weekly declines. The weakening is due to investor concerns that Euro-Zone debt problems will lead investors to lose their appetite for emerging market currencies until some solutions are in sight.

Mexico’s economy is forecasted to grow by 3 percent this year according to Deputy Finance Minister Alejandro Werner. Mexico is the second largest economy in the Latin American region.

 

Comment