Euro breaks below $1.20

Reuters ^ | June 24, 2005

[RWR8189]

TOKYO (Reuters) - The euro fell below $1.20 for the first time in 10 months on Friday as traders bet that euro zone interest rates will eventually be cut and make the dollar an even more attractive destination for investors. A combination of Sweden's central bank slashing interest rates this week and the Bank of England moving closer to lowering rates has thrown the spotlight on the European Central Bank. ECB officials have held firm that current rates at 2 percent are appropriate, but political pressure has mounted on the euro zone's central bank to do something about the region's struggling economy.

Speculation about a rate cut has heated up in the wake of the French and Dutch "no" votes on the European Union constitution and the failure of EU leaders to settle on a long-term budget.

The euro spiked as low as $1.1981, according to data from electronic trading platform EBS. A large-lot sale of euros by a U.S. brokerage triggered stop-loss selling lined up around $1.20, dealers said.

The common currency bounced back to late New York levels around $1.2035 by 0547 GMT, though most analysts expect a relapse to below $1.20.

"I'd thought it was just a matter of time before the euro broke below $1.20," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp. "I think the euro will spend more time below $1.20 than above that level next week."

With the Federal Reserve poised to keep raising U.S. rates, investors have flocked to the dollar for its yield appeal.

The next week will provide a key test of whether the euro will continue its 11 percent slide against the dollar in the past three months.

A heavy slate of U.S. data along with a Fed meeting will shed light on the economy's strength and outlook for more Fed credit tightening.

"We anticipate euro weakness may continue through the coming days," currency strategists at Morgan Stanley said in a note to clients.

The Fed is widely seen pushing up rates by a quarter percentage point after a two-day meeting ends on Thursday, taking it to 3.25 percent from 1 percent a year ago. Another such rate increase is expected at the Fed's August meeting.

ECB chief Jean-Claude Trichet will have a chance to clarify the central bank's monetary policy stance in a speech at 1300 GMT.

YET MORE YUAN TALK

Revived speculation that China will soon loosen the yuan's tight peg to the dollar also hammered the euro to a one-year low against the yen on Thursday.

Traders often snap up the yen as a proxy for any revaluation that would let the yuan appreciate.

The single currency straddled the 131 yen line for much of Tokyo trading hours. It dropped to the day's low around 130.80 yen on the euro's sharp fall versus the dollar, just above the one-year low near 130.60 yen.

Still, the yen has languished against the dollar around 109 yen, in sight of eight-month lows but trapped between the dollar's allure and euro's decline.

The Japanese currency fetched 108.95 per dollar stuck between 108 yen and 109.50 yen for the past two weeks.

China's yuan policy is set to be an ongoing topic for currency markets ahead.

Japan's finance minister, Sadakazu Tanigaki, said on Friday that the yuan would likely be a topic when he meets his Chinese counterpart over the weekend, the first bilateral meeting of the two countries' finance ministers in four years.

China's state-run Xinhua news agency reported on Thursday that the country's foreign exchange regime would likely be discussed when President Hu Jintao participates in the Group of Eight summit in Scotland on July 6-8.

[Spktyr]

"Freeeeeeefallin', yeah it's freeeeefallin'!"

[Crazieman]

Money is just property that will be seized sooner or later.

Who cares anymore

[Jimmy Valentine]

Watch for this to become trendy toilet paper before long

[hershey]

My Italian friend with dual American citizenship, but whose heart lies in Milan, and who constantly trumpets how much better Italy/EU is, how American sticks its nose where it doesn't belong, what 'you' are doing wrong (never 'we', so she thinks Italy 24/7), couldn't believe her homeland is toying with the notion of returning to the lira.

[Michael81Dus]

Ehem. You know that the Euro was worth 88 cents some years ago??

[Jimmy Valentine]

Going to worth less when all is done. The Europeans have been artificially pegging the Euro much higher than it should be.

When free market forces and governments abandoning the Euro for their traditional currencies begins to effect the market, watch out.

[Paulus]

I think that when it is all over and done with their will be only 10 countries in the EU and these countries will use the Euro. All other countries will go back to their previous currencies.

[Jimmy Valentine]

When people realize that they are not really into being told what to do by some totally corrupt, unelected as*h*les in Brussels you will see much less than ten in the EU

[goldstategop]

I've bought Birkenstock footwear from Europe. Its a bargain thanks to the weak Euro. Germany is a bargain hunters paradise for Americans. Whip out your credit cards and snap up the savings!

(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)

[IronMan04]

Actually, the concept of the euro was that it would be 1:1 with the dollar and then be allowed to float with other hard currencies. Therefore, the $ is still down 20% and as long as the US has major deficit spending the euro will continue to beat the dollar.

[IronMan04]

Again, the EU as a political structure is an afterthought of the ECSC esbabhished in 1952 to unify coal and steel policies among Germany, France and the Belelux states.


See: Functionalism

[IronMan04]

Again, the EU as a political structure is an afterthought of the ECSC esbabhished in 1952 to unify coal and steel policies among Germany, France and the Belelux states.


See: Functionalism

[Paulus]

Excellent point. I had never thought of it that way

[Erik Latranyi]

...as long as the US has major deficit spending the euro will continue to beat the dollar.

The deficit is only a part of the equation. US Economic growth is fueling demand for dollars. As long as Europe's economy is growing at anemic rates and with the uncertainty of the European Union, the US will be very attractive to investors.

I see this trend continuing.....

[IronMan04]

Yes, it is tough to grow an economy with a 35 hour work week but keep in mind that people India and China work 80+ hours weeks and are growing at rates that make our economy look anemic.

Furthermore, as long as the EU (Remember it is an economic union not political) can maintain its debt to GDP ratio the euro will be strong.

The bottom line is that we cannot have the debt we now have and expect to maintain a strong economy. Within 20 years states will dump the dollar as their reserve currency and OPEC may soon only take payment in euros instead of dollars.

That is the nightmare scenario.

[IronMan04]

Yes, it is tough to grow an economy with a 35 hour work week but keep in mind that people India and China work 80+ hours weeks and are growing at rates that make our economy look anemic.

Furthermore, as long as the EU (Remember it is an economic union not political) can maintain its debt to GDP ratio the euro will be strong.

The bottom line is that we cannot have the debt we now have and expect to maintain a strong economy. Within 20 years states will dump the dollar as their reserve currency and OPEC may soon only take payment in euros instead of dollars.

That is the nightmare scenario.

[kingu]

Therefore, the $ is still down 20% and as long as the US has major deficit spending the euro will continue to beat the dollar.

Let us examine the CIA World Fact Book, 2005 Edition. Deficits, European Countries compared to United States...

The United States is #34 on the list of largest public debt vs GDP, 65% in fact. For the EU, we have ... #33 Germany. #31 France, #22 Turkey, #9 Italy, #8 Greece.

If massive deficit spending were an issue here, why would currency traders support a country that has 105% of their GDP tied up in public debt (Italy)? Or 112%, such as Greece?

Such talk in the financial pages is just yet another excuse to bash the US, but of course, we'll see yet another quote from the G8 summit with France, Italy and Japan complaining about the big deficits that the US is racking up. Oh, and Japan is #3 on the list with a whopping 164.3% of their GDP in public debt. I'm sure the currency traders will be wiping out the value of the Yen tomorrow.

Don't hold your breath.

[IronMan04]

Currency traders steeped in economic liberalism and thus have no political allegiance. Their only concern is to be holding the right currency at the right time.

For example Soros did not borrow ten billion pounds and then sell them for dollars, yen and marks to devastate the UK economy. Instead he did so because he knew the pound was overvalued and that it would soon have to be devalued.

And when he was shorting the dollar he did not do so to break the US economy. He did so to make a buck. CT's are the ultimate capitalists. They care nothing for Governments they are the anarchists.

[Moonman62]

And when he was shorting the dollar he did not do so to break the US economy. He did so to make a buck. CT's are the ultimate capitalists. They care nothing for Governments they are the anarchists.

Private property is the foundation of capitalism, not greed as so many anti-capitalists would have us believe. I think a better term for currecy traders is speculators.