Monday, December 6, 2010

EUR/USD – the euro, from life buoy to millstone

The drop in EUR/USD in November was mainly down to the uncertainty surrounding the European public finances and the associated weaknening of the euro. Once a life buoy for the troubled eurozone countries, the single currency has now become the proverbial albatross. The weak EMU members are unable to devalue their domestic currencies as they could have done before the introduction of the euro. Now, only lower wages and prices can help them become more competitive. Yet this amounts to economic suicide as old debts will start to weigh ever heavier. Therefore the stronger euro economies have no choice but to offer a helping hand, which meets with mounting political opposition and does not really contribute to structural solutions for the underlying problems. In our view the survival of the common currency will continue to hang in the balance. Moreover, the ECB will be forced to keep its monetary policy loose, which will impact negatively on the euro. Over the coming months to quarters EUR/USD could drop towards 1.15. Any intermediate rallies will likely stop near 1.35.

Read the full report here: