Wednesday, May 12, 2010

Euro At A Critical Spot

In the wake of the massive, $1 trillion bailout package concocted by the European Union, IMF, and European Central Bank last weekend, conventional wisdom was that the euro would get a big boost. After all, it had fallen by more than 16% percent since the news of Greece’s budget problems first surfaced late last year. However, after a brief reprieve during the trading day on Monday, the euro has rolled over and fallen back down near the lows from last Thursday (currently trading at $1.26 - see chart below).

The lows around $1.23 - $1.25 from late 2008 and early 2009 are critically important. If the euro breaks lower than that, bearish investors may pile in more than they already have, driving the currency even lower, perhaps back towards parity with the U.S. dollar. That would be a crushing defeat for European leaders, since the recent bailout package was designed as a “shock & awe” attempt to save the currency and remove growing doubts about the ultimate survival of the European Monetary Union. A fresh drop in the currency would reignite fears of contagion and de-stabilization, likely leading to another bout of volatility in the financial markets.