Friday, July 29, 2011

Euro Pressured by European Crisis

Euro Pressured by European Crisis


Renewed concerns about Europe's ability to avert financial disaster pressured the euro, momentarily eclipsing the stormy U.S. debt-ceiling debate as investors mulled whether the euro-zone crisis could take a turn for the worse.

Barely a week after a landmark European Union summit struck an accord to rescue financially distressed Greece, investors have yet to be fully mollified.

Even in the face of widening pessimism about the U.S.'s ability to overcome the political stalemate and raise its $14.3 trillion debt ceiling by early next week, the euro fell for the second-consecutive session.

Analysts have nervously eyed the yields on Italian and Spanish government debt—the euro zone's third- and fourth-largest economies, respectively—as proxies of the market's growing concern that Europe can successfully manage the possibility of Greece's debt woes leapfrogging to Spain and Italy.

Italian government bond yields rose further Thursday after the Treasury held a long-term bond auction. Ten-year yields rose to 5.82% from 5.68%, and even two-year debt yields rose to 4.20%, well above the 3.5% interest rate that EU leaders promised the Greek government.

"The Italian auction did not go as well as expected and spreads are creeping higher," noted Brian Kim, currency strategist at RBS Securities. "As time goes by, people are getting a bit more skeptical" about the Greek rescue package. "You still need to see the details behind it all."

Late Thursday, the euro was at $1.4331, from $1.4369 late Wednesday. The dollar was at ¥77.72 from ¥77.99. The pound was at $1.6373 from $1.6331. The dollar was at 0.8010 Swiss franc from 0.8017 franc.

The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 74.117 from about 74.087.

In the meantime, today's dollar trading was choppy and range-bound, with the greenback rising against the euro but falling against the yen. Market watchers were waiting for the results of a congressional vote on a possible debt agreement.

The uncertainty that hangs over the market continues to contain the dollar's gains, as U.S. lawmakers are still at a loss to reach agreement on the debt ceiling. This has undermined risk sentiment, which helped drive stocks and other risk-correlated assets lower as investors fear either a default or a downgrade of the U.S.'s coveted triple-A credit rating—or both.

In a measure of how the debt-ceiling debate has undermined confidence in the dollar, risk-related currencies—which normally fall during periods of global turmoil—have surged for a lack of investors willing to hold the greenback.

Analysts say neither of the scenarios looks favorable in the long term. "The U.S. is just going to have to muddle through its own fiscal crisis," says Mark McCormick, currency strategist at Brown Brothers Harriman. He added that the likelihood of the U.S. going into default was still unlikely, but few are holding out hope for a perfect agreement as the Aug. 2 deadline approaches.

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