July 13th 2011: 5 reasons why the Euro isn’t trading much weaker
Amid the lurid media headlines during the past few days of Euro-zone crisis, panic and collapse, the surprising feature is not that the Euro has fallen – the big shock is that the currency is not trading substantially weaker. There is increasing evidence of longer-term forces at play which are keeping the Euro afloat. If we rewind just over 12 months ago to when the Greek crisis first erupted, the Euro hit a low below 1.20 against the dollar. Despite the debt crisis being much more severe this time and the Euro’s future in very serious doubt, EUR/USD is still close to 1.40.
The Euro-zone backdrop remains precarious at best with several of the weaker members already passing beyond their event horizon as they get pulled towards the black hole of default. Greece has no viable escape route from default with Portugal and Ireland also have no real possibility of escaping from the debt trap as they remain mired in recession. To avoid default, an economy either needs to let inflation and exports improve the debt-servicing profile through devaluation or there must be capital transfers and neither of these are possible under the current Euro set-up. It is increasingly likely that there will be a destructive break-up of the Euro-zone and the currency is likely to fall sharply this quarter, but strategic players are looking at the long-term view and to what happens after any break up.more...
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