Euro Gains in Early Trading

The euro pulled back from a ten month low against the US dollar in advance of the EU summit where European leaders are expected to discuss aid for Greece. The euro gained after Luxembourg Prime Minister Jean- Claude Juncker said that aid for Greece will consist of a combination of IMF “instruments and bilateral loans” designed to aid Greece. Differences in the EU still exist over whether to offer EU aid to Greece and what role the IMF will play. Some experts believe that turning to the IMF could hurt the credibility of the euro zone and create the impression that the EU is incapable of dealing with its own internal problems.  Matthew Strauss of RBC Capital Markets in Toronto stated, “The uncertainty is hurting the euro. Turning to the IMF could complicate the situation because IMF assistance comes with a number of strict conditions, both on the fiscal and monetary sides. Net-net, it’s negative for the euro if the euro zone cannot solve the problem on its own.”

Investors Hesitant

In early New York trading the euro gained 0.3% trading at $1.3350. Investors remain hesitant in advance of the EU summit. Niels Christensen of Nordea in Copenhagen said, “There have been some very rapid moves in the last 48 hours and everyone is a bit hesitant now. People want to get the EU meeting out of the way before trying to push euro/dollar lower again.” On Wednesday ratings agency Fitch downgraded Portugal’s sovereign debt rating reminding investors that Greece’s problems could spread to other Euro Zone nations.

DisagreementAmong EU Leaders

As head of Europe’s largest economy German Chancellor Angela Merkel is pushing for an IMF solution for Greece’s debt crisis. Some EU leaders disagree saying that the EU should handle its own problems. Spain’s Jose Luis Rodriguez Zapatero believes that an internal solution will lend credibility to the EU and its multi nation currency. Most observers believe that any solution to Greece’s problems will involve a combination of EU loans and IMF aid. Speaking to reporters Greek Prime Minister George Papandreou stated, “We will move ahead whatever decisions are taken. Greece is determined to deal with its own problems,” he said, adding that “we are on the right track.” The Athens government has implemented tax hikes and wage cuts in an attempt to reduce Greece’s deficit to 8.7% of GDP this year. Greece’s 2009 deficit amounted to 12.7% the highest in the euro’s history.

Quick Forex Tip: Political conditions play a major role in global currency trading. Political instability can cause a currency to lose value. Recently political problems and deficit concerns in Greece caused the euro to fall in global currency trading centers. Market psychology although difficult to define can also affect market perceptions and can either help or pressure currencies.

Greece May Turn to IMF For Help

Global stocks fell on Thursday and the euro fell vs. the US dollar as concerns over Greece’s debt crisis persist. Dow Jones Newswire reported that an unnamed Greek official said that Greece is increasingly pessimistic about receiving aid from the European Union and may turn to the International Monetary Fund for help in solving the nation’s massive deficits. Greek Finance Minister George Papaconstantinou described the report as “ridiculous” and said that most options are still open.  Ashraf Laidi of CMC Markets in London stated, “Three months have elapsed since the last credit downgrade of Greece and (there is) still no credible solution on how it will obtain 56 billion euros to meet its short-term debt obligations.” On Thursday Greek Prime Minister George Papandreou told the European Parliament that if Greece has to continue to borrow at high rates the recent budget cuts will not be sustainable. Papandreou also said that Greece will not default.

Germany Supports IMF Solution

Greece is counting on EU leaders to come up with some kind of mechanism to aid the indebted nation at the upcoming EU summit next week. Some EU countries, most notable Germany, are skittish about making any promises regarding aid to Greece. The chief financial spokesman for German Chancellor Angela Merkel’s party, the Christian Democratic Union, said that Greece should seek aid from the IMF. German lawmaker Michael Meister stated, “We have to think about who has the instruments to push for Greece to restore its capital-markets access. Nobody apart from the IMF has these instruments.”  Although Greece would prefer an EU based solution the Athens government said it is keeping “all options open” as long as Greece is forced to borrow “at an unreasonably high interest rate.”  Antje Praefcke of Commerzbank stated, “This just highlights the uncertainty surrounding the Greece issue. There seems to be no consensus in the euro zone, which is undermining confidence and that is what is weighing on the euro today.” A clear majority in the Dutch Parliament opposed EU aid to Greece and also thinks Greece should turn to the IMF for a solution to their debt problems.

Germany’s Hardball Stance

Some experts believe Germany will eventually soften its stance. Paul Hofheinz of the Lisbon Council, a Brussels research group, stated, “The Germans see the same thing that all of us see: that at the end of the day, they’re going to be part of the solution and it’s going to cost them something. When push comes to shove, I don’t think anyone doubts that the Germans will be part of this settlement. But why should they play easy?”

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Fed to Leave Rates at Historic Lows

The US dollar fell against most major currencies after the Federal Reserve repeated their pledge to keep interest rates ‘exceptionally low’ for an ‘extended period.’  The Fed did say that emergency measures to support the troubled housing market will end this month as planned. The Fed also said that the US economy has “continued to strengthen” but that “housing starts have been flat at depressed levels” and “employers remain reluctant to add to payrolls.” Fed Chairman Ben Bernanke is trying to decide how long to hold interest rates down to generate a solid recovery. Diane Swonk of Mesirow Financial in Chicago stated, “The recovery continues and remains on track to be subpar, at best. Businesses are finally stepping up to the plate and spending their cash flow, but the housing market and prospects for a broader-based recovery remain dim.” A recent report by the Commerce Department showed that housing starts were down 5.9% in February and the Obama administration told congress that unemployment is likely to “remain elevated for an extended period.” Many are starting to believe the phrase ‘extended period’ is political speak for ‘we don’t really know. ‘Speaking about the ‘extended period’ language David Tien of Fischer Francis Trees & Watts said, “The ‘extended period’ language means about three to four meetings of no change. This supports emerging market and peripheral currencies.”

EU Will Aid Greece

The euro gained on the greenback and the yen after EU finance ministers devised strategies for loans to Greece which has been a drag on the euro. Greece’s Prime Minister George Papandreou’s government is attempting to close budget deficits which are four times the 3% that EU rules allow. An unnamed EU official said that any aid to Greece would probably come from EU governments pooling funds for direct loans to Greece.

Commodity Linked Currencies Gain

Rising risk sentiment pushed the Canadian dollar also known as the ‘loonie’ to a two year high vs. the US dollar. Rising oil and gold prices helped to push the Loonie, the S African Rand and the Aussie dollar higher in currency markets. Almost half of all Canadian exports are raw materials including substantial quantities of oil. Precious metals account for about one fourth of S Africa’s exports.  Recent reports showing a rise in Chinese exports benefitted the Aussie dollar. Australia is one of China’s chief suppliers of raw materials. So far this year the loonie has gained 3.9% vs the US dollar. Many experts say the Fed’s statement prompted investors to seek higher yielding assets and currencies. Jack Spitz of National Bank of Canada stated, “The statement’s likely to put a bid to commodities and by extension commodity currencies, most notably the Canadian and Australian dollars. Ultimately, by continuing to maintain interest rates low it will continue to promote growth and what we get with that is seen through rising equities.”

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UK Manufacturing Falls in January

The pound remained under pressure for the third straight day and is on track to hit its lowest level against the US dollar in ten months after a report showed that UK manufacturing contracted. UK manufacturing fell 0.9% in January, the first time in five months according to a report from the Office for National Statistics. Economists had predicted a gain of 0.2%. Concerns about the UK’s debt rating also pressured the pound. Jeremy Stretch of Rabobank International stated, “Sterling remains weak amid ongoing concerns over debt ratings and political dynamics. The production data may have been impacted by the bad weather in January, and this may play into the broader sterling negativity.”

UK to Devise Strategies to Maintain Extraordinary Measures

Prime Minister Gordon Brown said he will deliver this year’s budget statement on March 24th and said that the UK’s economic recovery is still ‘fragile.’ Chancellor of the Exchequer Alistair Darling said that the government will devise strategies to maintain extraordinary measures as long as recovery is fragile. Political problems have also affected the pound’s performance in currency markets. Support for the Conservatives has been dwindling. The conservatives believe more spending cuts are necessary to maintain the UK’s debt rating. Daragh Maher said in a report that, “It will be an interesting budget, having to strike a balance between doing enough to prevent a downgrade, but giving enough to try and get re-elected. An announcement of a general election should follow shortly thereafter.”

Fitch’s ratings service said the UK needs to reduce budget deficits to 3% of GDP by 2014-2015. A representative of the service said that the UK’s spending adjustments are moving at ‘too slow’ a pace. Investor concerns that the UK is lagging behind the US and other nations in exiting the global recession has made the pound the worst performer in currency markets this year. The uncertain political situation in the UK is putting further pressure on the already troubled pound. Parliamentary elections, which must be held by June could result in political gridlock if either party fails to gain a clear majority and could hamper efforts to deal with massive deficits.

Portuguese Bond Sale, Chinese Data Lifts Euro

Wednesday brought a rare piece of good news for the troubled euro. The euro gained on the US dollar and the yen as strong Chinese export data and a better than expected Portuguese bond sale lifted risk appetite among investors. Portugal, which had planned to sell EUR750 million in bonds, ended up selling EUR990 million worth of long term bonds. Some analysts expect the euro to remain under pressure until some EU nations implement further austerity measures.

Quick Forex Tip: Political conditions play a major role in global currency trading. Political instability can cause a currency to lose value. Recently political problems and deficit concerns in Greece caused the euro to fall in global currency trading centers. Market psychology although difficult to define can also affect market perceptions and can either help or pressure currencies.

Euro Gains vs. Dollar

The troubled euro has fallen for the third straight month vs. the US dollar as Greece’s debt crisis continues to threaten the multi nation currency. Last week the euro posted its first gain on the dollar in six weeks after a report said that Germany may purchase Greek bonds through a government lender. In February the euro fell 1.7% vs. the dollar and 3.2% vs. the yen. John Shin of Bank of America Merrill Lynch stated, “The Greek crisis has had a real macro impact in Europe. Growth forecasts have been pushed down and expectations for a rate hike by the ECB are on hold.” According to a Bloomberg survey of economists the European Central Bank is expected to keep its refinancing rates at 1% after the ECB’s policy meeting this week.

EU Pressures Greece For More Austerity Measures

Greek Economy Minister Louka Katseli said that Prime Minister George Papandreou will review Greece’s budget plans. A mission by the European Union to Greece found that the nation’s austerity measures are not enough to satisfy financial markets and that more measures are needed. Katseli told a television audience that, “If more measures are to be taken, they will be announced soon. The red line for everyone in this government is that the measures are effective, bringing additional revenues, and that they are socially just.” EU Economic Affairs Commissioner Olli Rehn will talk to the Athens government on Monday and markets are speculating that if Rehn’s talks are successful the EU may announce aid measures for Greece in exchange for further austerity measures. European Parliament Jorgo Chatzimarkakis of Germany said that Germany, France and the Netherlands would purchase Greek bonds through state owned financial institutions.

Merkel Says No Decision Made on Greek Aid

In a television interview German Chancellor Angela Merkel said that Greece has been “very courageous” in planning measures to address the nation’s budget deficit. Merkel repeated last weeks comments that the euro is facing its roughest period since the multi nation currency was launched in 1999. Many believe Merkel is trying to influence public opinion in a nation where opposition to Greek aid is high. Merkel said that no decision has been made for financial assistance to Greece and that the German government expected the Athens government to take whatever steps are necessary to resolve the crisis. Merkel stated, “There have been absolutely no other decisions taken. I would like to say that quite clearly. Greece has to do what’s necessary for Greece. But that is also important for all of us.”

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