Currency Shifts as Stubborn Spain Blocks Eurozone Action

Lisa Smith, BA (Hons), CeFA

Nations in the single currency are fail as team players and continuing to place self-interest before the common good is pulling down the value of the Euro against the Pound and US Dollar.

The Euro had recovered from a dismal dip in confidence earlier in the year, after courts in Germany finally backed the European Central Bank’s plans for financial unity and the European Stability Mechanism to buy government bonds.

But after reaching a giddying four-month high against the US Dollar and even showing well against the Swiss Franc, it’s all gone wrong again.

In the past week, the Euro has lost 2% against the Pound and US Dollar, while sliding 3% against the Japanese Yen as the Spanish government grimly tries to avoid accepting a bail-out that will trigger the ECB in to action.

Lack of political union

The result is the loss of even more confidence in Europe’s Eurozone politicians and their will and ability to resolve the economic crisis.

“As we look forward, there doesn’t appear to be a reason to become more bullish towards the Euro. The past few years have proven that individual nations will pursue their own best interests until forced to take the action that is in the best interest of the Eurozone,” said Andy Scott, account manager at foreign currency exchange brokers HiFX.

“So Spain will no doubt postpone requesting aid until the last possible moment which will keep the debt discussions at the top of the European Union agenda, instead of politicians being able to focus on the economy which has been badly damaged by the ongoing crisis over the last few years.

“The lack of political union continues to prove the biggest hurdle to overcoming the debt crisis and all of the grand plans such as the banking union are included in this too.

Bond prices float back to 6%

“Our assessment and forecast for Euro/US Dollar is that having surged from its 1.20 base, it seems to be suffering from vertigo above 1.30 and therefore arguably may settle back towards the 1.25 area by year end. Pound/Euro continues to pivot the 1.25 area and as long as large question marks loom over Europe, arguably on the upper side of this pivot level.”

Meanwhile, as the Spanish government dithers, bond yields are rising, pushing up the nation’s price of borrowing to around 6% and rioting in the streets of Madrid and other major cities  against more austerity cuts.

This is against  a background of 25% unemployment, rock-bottom house prices and little or no credit available from banks.

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