IBT:Euro Holds Ground against U.S. Dollar as Panic Persists
The euro is holding ground against the U.S. dollar on Tuesday as panic persists. Presently, the euro trades around $1.4190, or 0.28% above its previous close. At the same time, the Japanese yen has broken below the ¥110 mark once more. At the moment, the euro surrendered 0.32% of its value in today's trading to stand around ¥109.96.
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Yesterday's trading can be called Black Monday as major U.S. indexes lost around 6% of their value. The panic, which started with a downgrade of the U.S. debt by S&P, continued in Tuesday's early trading as shares in Asia and Europe continued to slide. In this environment, gold seems to be investors' favored refuge. On Tuesday, the yellow metal rose 2.15% to stand around $1,757.45.
The euro is at its crucial turning point, just like the dollar. The Eurozone and U.S. leadership is expected to make bold moves in order to prevent their economies from slipping back into recession. So far, none are making these moves, which is not helping contain investors' fears. The euro is helped by the ECB intervention in bond markets. The ECB has avoided buying Italian and Spanish bonds for some time, but it has abandoned this policy in order to ease the pressure off the Eurozone's third and fourth largest economy.
Some analysts are arguing the ECB's interventions do not go far enough. For instance, Stephen King, HSBC's chief economist, urged the ECB to abandon its conservative fiscal doctrine and start a program of quantitative easing, very similar to what the Fed has been doing in the United States. When the choice is between expansionary monetary policy and the collapse of euro, a little bit of inflation does not sound like a bad option. However, it does not seem likely that the ECB will change its hawkish stance soon.
The fate of the Eurozone will depend on the muscle and determination of Germany, Europe's largest economy. The German economy has been going through a boom period in spite of massive problems in the rest of the developed world. However, bailouts are becoming increasingly unpopular among the German electorate. Angela Merkel's Christian Democrats have already suffered big defeats in a number of regional elections. The German Chancellor might be forced to choose between saving the Eurozone and her position as a prime minister.
It might not come down only to the willingness of Germany to help debt-ridden countries; the German economic muscle has its limits as well. On Tuesday, German economy reported discouraging news of a fall in the German trade balance surplus. According to Destatis, trade surplus in June was €11.5 billion, down from €12.9 billion in May. Most analysts had expected the June figure to be €12.8 billion. However, Germany's current account surplus surged in June to €11.9 billion from €6.7 billion in May.
