Posted on 06/01/2005 2:43:59 PM PDT by RWR8189
The under-fire euro fell further on Wednesday, slumping to an eight-month low against the US dollar amid rumblings over the long-term future of the eurozone.
The fresh selling was prompted by a report claiming that Hans Eichel, the German finance minister, and Axel Weber, the president of the Bundesbank, were present at a meeting at which the possible break-up of European Monetary Union was discussed.
The German Bundestag is also said to have commissioned a report on the legal repercussions of a country wishing to leave the EMU.
Germany’s finance ministry labelled the talk “absurd”, while Mr Eichel and Mr Weber issued a statement saying the euro was a “unique success story”. But the damage had been done.
Although most currency analysts regard the break-up of the eurozone as an extremely faint prospect, they said the potentially disastrous repercussions of such an event mean it could not be totally ignored.
Tony Norfield, global head of forex strategy at ABN Amro, put the probability of a splintering of the eurozone at “5 per cent or less”.
“Our view is that EMU will not break up. That will be way down the line as the last resort because of the political capital eveyone has got invested in it,” he said.
Nevertheless Mr Norfield added that if a break-up was to occur, it would be a “disaster” for the euro.
Alan Ruskin, research director at 4Cast, suggested Asian central bank diversification from the dollar into the euro, a key factor in the rise of the shared currency in the past three years, could now be questioned.
“The average speculative player may not worry about the breakdown in the euro in the next five years, but for those central banks thinking in decades and readily raising their ratio of euro reserve assets, these are extremely relevant questions,” he said.
Steven Pearson, chief currency strategist at HBOS, raised the prospect of a buyers’ strike by Asian central banks. “They are probably questioning whether they have taken the proportion of eurozone assets too far,” he said.
The euro was also undermined yesterday by renewed expectations that the next move from the European Central Bank may be to cut, rather than raise rates.
This talk, although by no means a majority view, was fanned yesterday by news that euorozne manufacturing output contracted for a second month in April. Furst quarter eurozone growth was also revised down.
Jim O’Neill, global head of economics at Goldman Sachs, forecast a rate cut in the third quarter of 2005, and floated the possibility of the ECB opening the door to such a move by talking down its inflation forecasts at the press conference due to be held in the wake of today’s monthly rate decision.
Exit polls suggesting a 63 per cent no vote from the Dutch weakened the euro even further in US trading, where it slid to $1.216 from $1.223 in London, taking its slide against the dollar since mid-March to more than 9 per cent. The euro also hit a nine-month low of Y132.52 against the yen, and a four-week low of £0.6749 against sterling.
The euro’s woe spread further afield with rumours of a devaluation of the Moroccan dirham, possibly by up to 15 per cent, to counter strength against the euro.
Elsewhere sterling fell 0.3 per cent to $1.8111 against the dollar, just off a fresh seven-month low of $1.8094, and 0.4 per cent to Y196.28 against the yen after the Chartered Institute of Purchasing and Supply’s UK manufacturing survey fell to its lowest level since March 2003.
“This is a particularly depressing report, even by recent standards,” said Howard Archer at Global Insight.
The Australian dollar fell 0.7 per cent to a seven-month low of $0.7501 after first quarter economic growth came in at a disappointing 0.7 per cent.
■The recent ructions in the currency markets have had their effect on trading volumes. The Chicago Mercantile Exchange reported a record 230,844 euro FX futures contracts traded on Tuesday, representing a notional value of $35.5bn
EBS, the interdealer platform, also reported a sharp surge in volumes on the same day. More than $200bn was traded on the system, up sharply from the daily $110bn average seen this year. A total 89,949 trades were conducted with euro-dollar the most active pair.
Last year, the Bank for International Settlements’ triennial study of the FX market reported record average daily volumes in the spot, forward and options markets of $1,900bn.
too freaking funny, maybe I should hold on to a few euros.... who knows in a few years they may be collector pieces like confederate dollars.
Seems like something else is being flushed down the toilet these days.
I believe Mr. Norfield was referring to a breakup of the European Monetary Union, not the euro itself.
They are indeed. I imagine the lights are burning way into the night in many central banks around the globe just to see what the scenarios look like.
There are probably other folks trying a few changes to their models also.
Agreed. However, it would be survivable as long as a conversion back to the various currencies it supplanted was allowed. Assuming it hadn't been overvalued to give the receiving countries a financial 'incentive' to trade in their old money in the first place, that is.
Oh wait - I guess it would be a problem.
The European Monetary Union is source of the Euro.
It's like saying that if the Federal Reserve broke-up and ceased to issue dollars, that it would be a disaster for the dollar.
Or that if the kitchen stove broke, that it would be a disaster for the pot roast.
Which takes just how much brain power to figure out?
It's why China isnt selling their dollars to buy Euros...they know the currency (Euro) is monopoly money.
It's like saying that if the Federal Reserve broke-up and ceased to issue dollars, that it would be a disaster for the dollar.
Or that if the kitchen stove broke, that it would be a disaster for the pot roast.
Which takes just how much brain power to figure out?
I'll never argue that his statement wasn't a huge exposition of the obvious. But it wasn't the nonsense statement of 'the breakup of the Euro would be disastrous to the Euro' that you were making it out to be.
Yeah, but just watching the expressions on their pompous faces would be worth it.
No biggie if you are prepared. Save up your money in a mixture of cash, treasury bonds, gold, and real estate. Then, when the depression hits, you can buy up down-town real estate for pennies on the dollar. You can hire maids and butlers for nothing, and every hot chick in town will be hitting on you. All you have to do it be prepared.
Try them before the World Court? Turn them over to Kofi Anan? What?
(Mussolini and Hitler would be devastated over this outraged!)
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The German Bundestag is also said to have commissioned a report on the legal repercussions of a country wishing to leave the EMU.
Germany’s finance ministry labelled the talk “absurd”, while Mr Eichel and Mr Weber issued a statement saying the euro was a “unique success story”. But the damage had been done.
What I want to do is dump the Mexicans, and have a free trade agreement with Canada, Ireland, Iceland, the UK, and the New Europe nations i.e. Poland, Czechs, etc.
"But the collapse of the dollar which may very well follow in lockstep would kinda kill the joy. The economic depression during the 30s started in Europe, and spread quickly, and the world is much more closely intergrated today then it was then. For one thing the US real estate bubble would burst as European held assets in the US go on the block in a firesale."
Not really the world has evolved since the great depression and economies have evolved with it. The US Dollar would probably be strengthened since people would sell Euros and buy up the safer currency. To be sure there would be repercussions but survivable.
The leaders of Mexico, the United States, and Canada all have said they want the same union for North America.
What to do.
Tell them that "It's a small world after all" and that they can piss off, because location doesn't really matter all that much anymore. And by the way, we will take Australia and New Zealand as well.
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