It was rough week for the euro and next week could prove an even tougher one if Greece's parliament does not approve a package of austerity measures. Passage is mandatory for the country to secure more bailout funds from eurozone governments. If more funds are not secured, Greece could default on its massive debt, which would roil markets.
--- Euro drops vs dollar, off 1.6pc this month
--- End of QE2 seen impacting forex volatility
Worries about Greece caused the euro to drop against the dollar for three straight sessions, pushing the single currency down 0.9 percent for the week and off 1.6 percent this month. "It is make or break time for the euro next week," said Mark McCormick, currency strategist at Brown Brother Harriman in New York. "A lot hinges on this vote."
While Greece's successful confidence vote this past week raised the possibility the austerity program will pass, such an outcome is not guaranteed, particularly given a disgruntled opposition and public revolt. The vote is scheduled for June 29 and 30 and the result should not only dictate the direction of the euro, but also global financial markets.
McCormick said if Greece's package does not pass, the euro will likely break through the $1.40 level and could potentially reach $1.36, a level not seen since February. Thomas Robopoulos, a deputy of Greece's ruling PASOK party, rattled markets on Friday when he said he will vote against the mix of higher taxes, spending cuts and sales of state-owned assets. His remarks helped the euro wipe out initial gains on a stronger-than-expected survey of German business sentiment.
"If Greece defaults it would be a pretty big systemic event and there will be ramifications not only for the euro, but throughout global financial markets," McCormick said. In late afternoon New York trading, the euro was off 0.6 percent on the day at $1.41720. Concerns about Italy also weighed on the euro, with some Italian bank shares tumbling before being halted.
Against the Swiss currency, the euro was last at 1.1882 Swiss francs, down 0.6 percent, after hitting a record low of 1.1844 on electronic trading platform EBS. The single currency was also weaker versus the yen, trading down 0.6 percent at 114.08 yen. The Eurogroup - the finance ministers of the eurozone - meets on July 3 to decide on a Greek bailout package.
Greece accepted a package of 110 billion euros of European Union and International Monetary Fund loans in May 2010 but now needs a second bailout of a similar size to meet its financial obligations until the end of 2014. The US Federal Reserve, meanwhile, ends its second round of quantitative easing, or QE2, next week. The programme, launched in November, 2010, entailed buying $600 billion in Treasury securities. It has been a negative for the dollar as it was tantamount to printing money, diluting the value of the greenback.
Aroop Chatterjee, chief FX quant strategist, and Jeffrey Young, head of North American FX research at Barclays Capital in New York, said the end of QE2 has implications for FX spot and vol markets and is likely to lead to higher volatilities for most currencies at some point during the next 6-12 months.
"Further, as the effect of QE2 wanes and liquidity supply potentially tightens, the riskiness of assets will likely rise; we see this pushing up the riskiness of the high carry currencies versus those of the safer havens," they said in a report. Currency speculators reduced bets against the US dollar for the second straight week, according to data from the Commodity Futures Commission released on Friday.
The dollar fell 0.1 percent to 80.44 yen. The dollar index, which measures its value against a basket of currencies, traded 0.3 percent higher on the day at 75.652. Next week US economic data is relatively light, making headlines out of Europe all the more likely to impact financial markets. The highlight of US data will be Friday's June ISM manufacturing survey.
Comments
Comments are closed.