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Euro in wait-and-see mode

29 May 2010

The Euro remains in a vulnerable position with a lot of economic and environmental factors affecting Europe, Asia, and US markets. One Euro is currently worth $1.2313 in mid-day Asia currency trade.

The significant debt crisis affecting European economies including Greece, Spain, and Portugal, has impacted the Euro the most in the last few weeks. However, downward movement has been modest after news of bailout assistance for Greece and other encouraging news about the situation abroad.

After breaking through major long-term support in the $1.24-1.25 range, the Euro quickly slipped below $1.22. It soon bounced back toward $1. 26, though, after the assistance package was confirmed. Speculators still appear to believe the Euro is a risky bet compared to the dollar given the economic states of both regions.

Gross domestic product grew by three per cent in the US during the first quarter according to a just released government report. This was below the 3.5 per cent forecast and the 3.2 per cent from previous estimates, but it still bodes well for the direction of the US economy.

Oil prices have stabilized later this week as news of the BP oil spill cleanup has been the headline story on most newscasts. Thursday evening, the BP spill officially overtook the Exxon spill in 1988 as the largest oil spill ever. Speculators, after reacting to the news, have since pushed oil prices back to the mid-$70s based on growing demand in Asia and anticipating of growing global oil demand.

With oil prices steady and potentially rising, the Euro could get a boost. Still to come, though, are rate hikes by the Fed. Despite commentary of an ‘extended period’ of low rates, Central Bank leaders are going to have to begin contemplating rate increases as the GDP improves and the economy strengthens. Mortgage rates are currently near record lows once again (sub-five per cent).

With the likelihood of rate increases and the general comparison of the state of both US and European economies, many analysts surmise that a lower Euro is in the works. If the Euro is unable to regain its footing above the mid-$1.20s, a sharper and steeper drop toward the $1 level could be coming. There is little major support in near sight for the Euro against the dollar if selling momentum picks up.

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