The continuing Eurozone debt woes and the Euro - Outside View by Asad Dossani

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

The continuing Eurozone debt woes and the Euro
Mar 28, 2011

Two important events occurred this week that concern the Eurozone and its continued debt troubles. First, Portugal's debt was again downgraded by Standard & Poor, this time from A- to BBB. Second, European leaders have agreed new plans for a bail out fund to help indebted countries.

Portugal has had numerous political problems when it comes to implementation of austerity measures. The prime minister resigned earlier after the government did not pass through austerity measures required to bring down the deficit and debt levels. Markets are increasingly worried that Portugal lacks the political will to see through reforms, and this has led to the ratings downgrade. Yields on Portuguese government bonds have also gone up in response to this.

The new European bail out fund has also been filled with political troubles. Namely, there has been much negotiation over the amount each country would be required to put into a bail out fund. This is the case as most countries are going through their own austerity measures, and there is little public support to use funds to bail out other countries.

Despite the fact that Portugal may be close to a bail out, that debt problems seem to be spreading, the euro has continued to perform well. Against the dollar, the euro is trading above 1.40 for the first time since last November and before that the euro was at 1.40 last January. Against the rupee as well, the euro is near its all time highs. Doesn't it seem strange that the Euro is around the same level it was in January 2010 before all the debt troubles began? Many investors would have assumed in January 2010 that if a debt crisis were going to occur over the next year, the value of the euro would surely fall over that time. So why has it done so well?

The main reason is Germany. The German economy has proved to be very resilient throughout this whole crisis, and their strong economic performance has kept the value of the euro up. France's economic performance has also been strong, though not to the same extent as Germany's.

The other reason the euro has performed well is that the US dollar has performed poorly. The euro-dollar is the most widely traded currency pair and so it is very uncommon for both the euro and dollar to move in the same direction. Thus, the weaker US dollar due in part to quantitative easing polices by the Fed has helped to keep the euro strong.

The Eurozone debt crisis certainly has come way to play out. Portugal is likely to need a bailout at some point in the future, and countries like Spain continue to be on the radar for many investors. The euro has held its ground well so far, but there is no guarantee this will continue going forward.

Disclosure: I do not hold the currency/commodity discussed in this report.

Asad is an Economics Graduate from The London School of Economics who has also been a part of the currency derivatives team of Deutsche Bank in London. Currently pursuing his PhD at the University of California San Diego where he's researching on Algorithmic Trading Strategies, Asad will be your direct line for answers to all the questions you might have on short-term investing. A part of the Equitymaster Team since 2010, Asad has been sharing his knowledge on short term trading strategies with our valued readers, like you, through our various services. In fact, at the last count, his weekly newsletter, Profit Hunter, was being delivered to more than 100,000 smart traders across the world!

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "The continuing Eurozone debt woes and the Euro". Click here!

  

More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

These 5 Penny Stocks are Held by Rakesh Jhunjhunwala. Worth a Look? (Views On News)

Jan 18, 2022

Rakesh Jhunjhunwala is holding these penny stocks in his portfolio for several years now.

Tech Mahindra's CTC Acquisition: Too Expensive? (Views On News)

Jan 18, 2022

Tech Mahindra's acquisition of European IT-company fails to excite investors.

5 Hidden Tata Group Companies to Add to Your Watchlist (Views On News)

Jan 18, 2022

Here's all you need to know about these five Tata group stocks that aren't as popular as the others.

Insiders are Buying into these 6 Stocks Aggressively. More Details here... (Views On News)

Jan 19, 2022

While promoter holding is an important parameter, it should not be the sole reason for buying a stock.

Top Indian Drone Companies to Watch Out for in 2022 (Views On News)

Jan 21, 2022

Several companies are adopting drone technology for regular business operations.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS