Big Money Forum >> Stock Trading and Forex

Is the Euro in Trouble?

3.23.08

The euro, the official currency of the European Union (EU) and the main currency of over 320 million people, has posted its biggest weekly decline against the dollar and against other major currencies since June 2006. These declines are based on speculation of a slowing economy within the EU and that the European Central Bank (ECB) will now join the US Federal Reserve in reducing interest rates.

“The longer the ECB delays rate cuts, the worse for the euro-zone economy, and the weaker euro is reflecting that,” said David Gilmore, a partner at Foreign Exchange Analytics, an Essex, Connecticut-based consulting firm. Gilmore added, “The Fed is getting ahead of the slowdown. It's in a better position to weather the storm. The market is putting a bottom on the dollar.”

The euro lost 2 percent against the dollar this past week falling from $1.4802 on February 1st to a low of $1.4440 before gaining slightly as trading closed on Friday at $1.4512. The $1.4440 rate was the lowest trading level since January 22nd. The euro also experienced a 1.2 percent decrease drop against the Japanese yen from 157.67 to 155.81. Losses were also experienced against the Mexican peso and the Taiwan dollar.

The euro did make a slight rebound earlier this month to $1.4546 after the Middle East Business Intelligence, a magazine, reported that OPEC is considering a switch from the dollar to the euro for pricing oil. The headline “did add more juice” to the euro, said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc. Osborne stated that the move was “short-lived;” adding “the dollar is still the major currency in global commodity transactions.” In the interview OPEC Secretary General Abdullah al-Bardi said that the switch “can be done, but it will take time,” the magazine reported on its Web site.

The U.S. currency has gained 2.4 percent versus the euro since the Fed lowered its benchmark rate a half-percentage point to 3 percent on Jan. 30, following a three-quarter-point emergency cut eight days earlier. The Fed has reduced the rate 2.25 percentage points since Sept. 18, 2007. The U.S. Dollar Index traded on ICE Futures in New York, which tracks the currency against six major counterparts, rose on Friday, February 8th to 77.04, the highest level since Jan. 22. It had started the day at 76.65. This continuing recovery is from an all time low of 74.484 which was experienced on Nov. 23, which was the lowest level since trading began in 1973.

The rebound in the dollar predicted by UBS AG, BNP Paribas SA and Deutsche Bank AG is gaining momentum after ECB President Jean-Claude Trichet said “risks surrounding the outlook for economic activity lie on the downside.” Trichet's comments and the resulting gain in the dollar suggest the Fed's decision to lower borrowing costs twice last month put the U.S. economy on course to recover faster than Europe. Investors raised bets the ECB will start reducing interest rates in the second quarter. The central bank kept its benchmark interest rate at a six-year high of 4 percent yesterday to curb inflation.

The implied rate on the June Euribor interest-rate futures contract declined to 3.69 percent, from 3.76 percent Friday. The rate averaged 18 basis points more than the ECB's benchmark from 1999 until August, when the collapse of the U.S. subprime- mortgage market sparked turmoil in financial markets.

“We see further potential for dollar upside versus the euro,” said Geoffrey Yu, a currency strategist at Zurich-based UBS who has advised the bank's clients to buy the dollar since at least October. “We've seen the euro collapse on the back of some dovish comments by Trichet and weak economic data. These trends can only continue.”

Morgan Stanley, the second-largest U.S. securities firm, has recommended that investors sell euros for dollars because the market is shifting away from “interest-rate differentials toward relative growth differentials.” The dollar may rise from today’s rate of $0.689 per euro to a potential $1.32 against the euro at the end of the year, Morgan Stanley forecast.

“I won't be surprised to see the dollar strengthen from here,” said Jeff Gladstein, global head of foreign-exchange trading in Wilton, Connecticut, at AIG Financial Products. “In the turbulent markets, risk aversion is on the forefront. It's hard for short-dollar positions to gain traction.” The firm is a unit of American International Group Inc., the world's largest insurer by assets. A short position is a bet on a currency's decline.

Currencies will be high on the agenda when finance ministers and central bankers from Canada, France, Germany, Italy, Japan, the U.K. and the U.S. at the Group of Seven summit in Tokyo.

To get more news and information about the exchange rates, forex and stock trading, check out our Stock Trading and Forex forums for the latest. Also learn how to trade stocks, ask questions and share your opinions. Join our community today and start making some big money and investments!