November 13, 2011In Currency Market, All Eyes on Europe
The tentative market relief that boosted the euro on Friday will likely carry over into this week, but continued support for the common currency will depend on how much credibility investors give Italy's new leadership and economic reforms.
At least temporarily, the market greeted a changing of the guard in both Rome and Athens with cautious optimism. Italy—the euro zone's third-largest economy, where embattled Prime Minister Silvio Berlusconi resigned over the weekend after the passage of austerity measures—is struggling to prevent investors from sending bond yields back to euro-era highs, which they hit last week. Meanwhile, the clock is ticking on Greece to implement a package of reforms as part of an international bailout.
Continues ...read more ..
Fears about European debt contagion continue to dictate the tone of global markets. Italian government-bond yields, which last week spiked above 7% before falling back later in the week, have become a key gauge of euro-zone financial distress. As a result, Monday's trading will provide an indication of how investors greet the post-Berlusconi era of austerity.
Worries that Italy could become the next domino to tumble in Europe's debt crisis pushed the common currency to a one-month low at $1.3484 last week, but the euro surged back to $1.3755 late Friday in New York after Italy's parliament passed a set of reforms.
This week's euro-zone data could also test the whipsawed currency, with readings due on German, French and euro-zone gross domestic product in the third quarter. Analysts at ING Bank estimate Germany, the euro zone's largest economy, grew 0.6% last quarter. But the bank forecasts that growth in the 17-nation currency bloc ground to a halt.
Analysts remain unconvinced the worst has passed in the debt crisis.
Friday's euphoria "is not justified. Neither Italy nor Greece can solve their own problems," said Ron Leven, currency strategist at Morgan Stanley. He argues that only European intervention on a massive scale can backstop both countries.
Many economists believe that relief in Italy's bond markets will come only from buying by the ECB, which last week aggressively waded into markets to bring down surging Italian yields. But on Friday, ECB member Jose Manuel Gonzalez-Paramo flatly rejected the idea of the central bank being a lender of last resort.
Mr. Leven said, "They [the ECB] keep telling us they won't, but ultimately the market is going to force them to do that."
The central bank already has its hands full with the weak European economy. The ECB took the first step toward a possible easing cycle by cutting benchmark rates a quarter percentage point two weeks ago, so any gains in the common currency would likely be constrained by falling yields.
Market watchers say the sluggish growth, the festering debt crisis and possibly falling interest rates make it hard to justify a strong euro.
Given Italy's financial woes, which are endangering the entire euro zone, "it is hard to see any sentiment improvement any time soon," ING analysts wrote in a research note Friday.
link
