Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Future of the Euro Currency in Question

Currencies / Euro Feb 21, 2010 - 06:07 AM GMT

By: Bryan_Rich

Currencies

Best Financial Markets Analysis ArticleAt the beginning of this year, I wrote a Money and Markets column entitled “Will the Euro Become the Most Hated Currency for 2010?

At that time, the euro/dollar exchange rate was about 5 percent off of its 2009 highs. And we were just months removed from hearing the constant and broadly espoused opinions suggesting the euro would become the world’s next primary reserve currency — replacing the troubled U.S. dollar.


But the focus of global investors was starting to shift …

Concerns were beginning to turn away from the “minor hiccup” of a debt-restructuring surprise in Dubai, and toward the fiscal deficit problems in the Eurozone — specifically Greece.

Meanwhile, the euro bulls were still beating their drums …

The overall consensus was still advertising the pullback in the euro as an attractive buying opportunity. In fact, the median forecast of 43 economists polled by Bloomberg was calling for the euro to trade at 1.51 to the dollar by the end of March (a little more than a month from now).

But as I pointed out in my January 2 column, this type of market scrutiny surrounding sovereign debt can snowball quickly. In short, these problems have a history of being contagious and spreading throughout the world.

With the euro falling another 5 percent, the dollar looks mighty good!
With the euro falling another 5 percent, the dollar looks mighty good!

Since then …

The dollar doesn’t look so bad! And the euro has dropped another 5 percent and looks increasingly vulnerable to a break-up, or at least a structural change, of the monetary union. To sum up, it’s a decisive moment for the future of the common currency.

No-Win Situation …

With Portugal, Ireland, Italy and Spain all under the hot spotlight and the Greek situation worsening, European leaders stepped in last week in an attempt to stem the negative pressure on the Greek bond market and the euro. They said they would support Greece — a verbal commitment to do whatever was necessary. Yet they gave no details on how.

Nevertheless, a bail-out of a fellow Economic and Monetary Union (EMU) member country is a direct violation of rules set forth in the Stability and Growth Pact, the principles upon which the euro was built.

When questioned over the past month, the European Central Bank and European leaders consistently rejected any notions of a bail-out. But it appears they’ve ultimately conceded to the danger that Greece is presenting to the stability of the monetary union.

Perhaps this is why …

The Bank of International Settlements shows that European banks have $2.1 trillion exposure to sovereign debt of the weakest EMU countries (Portugal, Ireland, Greece and Spain). And it’s my guess that that exposure has only been exacerbated by the European Central Bank’s answer to “extraordinary monetary policy.”

Instead of overtly buying their own government debt, as is done by the U.S., Japan, the UK and many other countries, the European Central Bank’s liquidity strategy was to provide unlimited easy money to European banks — unlimited 1-percent funds for one year.

What did those banks do with the money? They bought up sovereign debt of the weak-link EU members, i.e. backdoor quantitative easing.

Credibility Damaged …

Regardless of the outcome, the euro’s creditability has taken a major hit.

First off, the integrity of the EMU is diminished when fiscal constraints are ignored. Secondly, the enforcement of those policies has been exposed as unenforceable. So countries have no incentive to responsibly manage their fiscal situation.

Instead, they can simply take cover under the broader monetary union, without suffering an attack on their currency.

Irreparable Moral Hazard …

Europe cannot afford to rescue Greece.” — Otmar Issing
“Europe cannot afford to rescue Greece.” — Otmar Issing

This week, former executive board member for the European Central Bank, Otmar Issing, wrote an op-ed piece in the Financial Times. He warned against a Greek bailout and, further, questioned the viability of the euro.

Here’s what he said …

“Starting monetary union without having established a political union was putting the cart before the horse.

“Once Greece was helped, the dam would be broken. A bail-out for the country that broke the rules would make it impossible to deny aid to others.”

Confidence Broken …

Just as European leaders were trying to stem the tide of negative sentiment and the sense of urgency and imminence surrounding the Greece situation, the Greece Finance Minister said publicly that they’re trying to change the “course of the Titanic” … an ominous statement for a situation so central to the future of the euro.

Then to add to the Eurozone’s problems, a controversy recently broke out exposing off-balance-sheet funding that Greece engaged in through “special currency swap” agreements with Goldman Sachs and other investment banks.

Several Eurozone countries are under investigation for their currency swap agreements.
Several Eurozone countries are under investigation for their currency swap agreements.

These special currency swaps appear to have allowed Greece to hide debt to gain entry into the currency bloc in 2001. Furthermore, other weak Eurozone countries are now being scrutinized for participating in similar accounting shenanigans.

To Sum It Up …

I’ve warned repeatedly that following such a widespread global economic crisis, synchronized with a financial crisis, the looming damage and time bombs would likely linger.

That’s why I’ve been recommending aggressive, long dollar exposure and short exposure to those currencies most vulnerable to global financial market shocks.

The global economic crisis has left the Eurozone with uneven economic performance. Some countries are recovering, many are not.

And that means countries with damaged balance sheets and a bleak outlook for growth are stuck. With a one-size fits all monetary policy and currency, they lack critical tools to work their way out.

So you can expect more problems ahead for the euro.

Regards,

Bryan

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in