Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24
Bitcoin Trend Forecast, Crypto's Exit Strategy - 31st May 24
Zimbabwe Officials Already Looking to Inflate New Gold-Backed Currency - 31st May 24
India Silver Imports Have Already Topped 2023 Total - 31st May 24
Gold Has Done Its Job – Isn’t That Enough? - 31st May 24
Gold Stocks Catching Up - 31st May 24
Time to take the RED Pill - 28th May 24
US Economy Slowing Slipping into Recession, But Not There Yet - 28th May 24
Gold vs. Silver – Very Important Medium-term Signal - 28th May 24
Is Gold Price Heading to $2,275 - 2,280? - 28th May 24
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Next Down Leg for the Euro

Currencies / Euro Mar 20, 2010 - 03:10 PM GMT

By: Bryan_Rich


Best Financial Markets Analysis ArticleThere are two major issues facing global currencies in the months ahead. And both have escalated in the past week.

Issue #1: The Greek Drama

Act I: Sovereign debt fears

In the first act of the euro-zone sovereign debt shock, shaky Greek government finances exposed the structural flaws of the euro. And as the lens of scrutiny widened, the potential domino effect of weak euro-zone countries combined to represent a viable threat to the future existence of the euro.

I called attention to this vulnerability back in early January in my piece, Will the Euro Become the Most Hated Currency for 2010? Since then, the euro plunged another 6 percent against the dollar and the outlook has grown increasingly tenuous.


Bail out?

But in came talks of a bail out. And that marked a timeout for the massive speculative selling pressure against the euro. Euro-zone leaders gathered and emerged with a promise of support for its flagging member country, Greece. But the implications of such a decision would bring with it an irreparable moral hazard. If Greece could be bailed out, that opens the floodgates for the other weak countries in the euro zone to come looking for support from their more fiscally responsible neighbors.

Now, with increasing signs that no concrete form of financial aid will be offered to Greece, the sovereign debt problems weighing on the euro currency are approaching Act II.

Act II: The realization of a no-win situation for the euro …

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. And that’s why euro-zone leadership has been slow to provide details of their proposed support.

But this past week, Greek Prime Minister Papandreou turned up the heat. He asked for a definitive decision on aid from Europe to come by next week. His bargaining chip: IFM aid. If the euro zone is not prepared to step in with financial aid, he’ll turn to the IMF. And a turn to the IMF represents a further credibility hit for the European monetary union … i.e. the structure of the euro is flawed, its rules are unenforceable and solidarity isn’t possible.

And with an official deadline for speculators to lean on, this coming week could bring with it the catalyst for the next big leg down in the euro.

Take a look at this chart …

Euro Chart

Source: Bloomberg

The euro had a false break from the four-month bear channel, but now is on track to test the lower line of this channel, which projects a test of the 2009 lows of 1.2457 by the end of April. Coincidentally, Greece will have to come up with 14 billion dollars in fresh capital to refinance maturing government debt by that time.

And as I laid out in my February 20th Money and Markets column, The Future of the Euro in Question, expect the intense scrutiny surrounding the lifespan of the euro to continue.

The EMU 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.

Issue #2: China’s Currency

While a sovereign debt crisis will likely be potent enough to knock global recovery off track, the most severe threat to the global economy remains China’s currency, as I discussed in my February 27th column, Why You Should Be Worried About China.

And the issue with China’s currency heated up this week.

With the healthcare debacle in Washington death-spiraling favorability polls, it became time to pull out the China card again.

Senators Schumer and Graham are spearheading efforts to force China to revalue its currency.
Senators Schumer and Graham are spearheading efforts to force China to revalue its currency.

Last week Congress resurrected threats against China’s currency policy. In 2005, Senators Graham and Schumer, lobbied a bill which threatened a 27.5 percent tariff on Chinese imports, unless China revalued its currency. Now the two Senators are spearheading new rules for the way the U.S. Treasury manages currency manipulators and proposes tougher consequences.

Tougher Talk … More Resistance

In 2005, the global economy was humming along, and China had a lot to lose by not showing some concession. Today, times are different. Global demand is weak and China’s major trading partners are dealing with sluggish growth. And despite the assertions of China’s emerging domestic demand, China has built its economic model on exports. So, in tough times, disabling their trade advantage through a currency revaluation is not likely.

That’s why I’ve been expecting China’s currency policy to be the biggest threat to global economy recovery — fueling protectionism and damaging the global economy (see my September piece Protectionism: Enemy of Recovery for more details).

Overall, the issues with sovereign debt and global imbalances, fueled by China’s weak currency, present a big challenge for the global economy. That’s why I expect a sustained risk aversion to be the dominant theme of 2010.



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

© 2005-2022 - 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