Most Predict Dollar Gains
Most currency experts expect the US dollar to continue last week’s gains as concerns about Greece’s debt situation remains. The agreement between the European Union and the International Monetary Fund to provide a safety net for the Athens government has prevented a euro freefall but euro sentiment remains negative among investors. Details of the agreement remain unclear causing investor concern. Some analysts fear that a similar crisis could occur in other EU nations. John McCarthy of ING stated, “Although we have this agreement on a Greece aid package, it is somewhat unclear as to whether it is going to be applied, when is it going to be applied…and the fact is Greece still has considerable debt. What’s to say that we will not go through this again with Greece or Portugal. This is not going away in the immediate future.” Some currency strategists have predicted that the euro could fall as low as $1.30 in spite of the EU IMF agreement. So far the euro has fallen 6.4% in 2010.
Germany Sets Conditions
In early 2010 concerns about the solvency of the Athens government emerged and the euro has remained under pressure since then. Although last week’s agreement decreases the likelihood of a sovereign debt default be Greece some are questioning the stability of the euro. Germany imposed strict conditions and almost one third of all Germans believe that Greece should be asked to leave the EU. Almost 40% in Germany believe that Germany would be better off outside the euro zone. Earlier in the month German Chancellor Angela Merkel said that EU members should help Greece if it is “at the brink of bankruptcy, which it luckily is not at the moment.” Many believe Greece has lived beyond its means and fear the crisis could spread to other EU states. Of particular concern to investors are other debt ridden euro zone members including, Portugal, Italy, Ireland, and Spain.
Concerns About Spain
Spain is of particular concern. Unemployment in Spain is at 20% and Spain’s deficit amounts to 9% of GDP and the nation is expected to take on more debt with bond issues. Many fear that a similar crisis in Spain would be devastating to the euro. Simon Tilford of the Centre for European Reform stated, “Spain is going to pose a big problem. It is in all sorts of trouble about how it will increase growth. It lost a great deal of competitiveness, and costs have gone up. Any economy regarded as having poor growth prospects is going to struggle to borrow at affordable levels.” Some have proposed the creation of a new currency bloc with Germany as the leader and would be composed of mostly northern European nations.
