World Week Ahead: Euro's plunge toward greenback

Monday 10th May 2010

As ash clouds from Iceland’s volcano thickened in European skies, leading to more airport closures, the much-darker prospect of parity between the euro and the US dollar finally seems to have prompted Euro-zone governments to act.

The euro plunged 4.3% against the greenback last week alone as investors doubted that European leaders had the collective will to defend their currency. More declines are expected this week, with one major bank forecasting parity for the two currencies early in 2011.

As foreign exchange traders and investors bailed out of the euro, the crisis of confidence stemming from Europe’s dithering on rescuing Greece hammered equities in both Europe and Wall Street. The Dow Jones Industrial Average plummetted almost 1000 points on Thursday, before recovering most of the losses.

Part of the dramatic plunge in US stock prices was being attributed to trading errors or glitches. While US regulators are investigating, the end result is that volatility has returned with a vengeance and investors are fleeing for the sidelines.

American regulators may seek to slow trading when prices are in a free fall, some reports say.

At the end of last week, Wall Street investors had wiped out overall index gains recorded so far this year, with the major indexes down by 6% to 8%.

The Standard & Poor’s 500 had its worst week since March 2009 when indexes hit a 12-year low. The broad-based measure fell 6.4% in five days. Major indexes turned negative for the year.

For the week, the Dow was off 5.7% and the Nasdaq dipped 8%. Over the past two weeks, the Nasdaq has fallen more than 10%, the threshold which many traders define as a market correction.

In Europe, the Dow Stoxx Europe had its worst week in 18 months, shedding 8.8% last week.

“Investors have grown more concerned that the environment just isn't safe, period," Stephen Massocca, managing director at Wedbush Morgan in San Francisco, told Reuters.

On the weekend, European leaders agreed to set up an emergency fund to contain Greece’s fiscal woes.

“We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters on Saturday, according to Bloomberg News.

Aroop Chatterjee, currency strategist at Barclays Capital in New York, told Reuters that: "Near term, the question is whether there are any positive catalysts on the horizon for the euro? It's hard to find these and so our view is that in the short term, being euro bearish makes a lot of sense."

Barclays Capital revised down its one-month and three-month targets for euro/dollar to US$1.20. BNP Paribas, on the other hand, said last week that the euro would fall to parity against the US dollar by the first quarter of 2011.

The US economic calendar this coming week is relatively light and will take a back seat to developments in Europe. On Friday, retail sales, industrial production and capacity utilisation, and consumer sentiment data are released.

The Bank of England is all but certain to leave interest rates at 0.5% and not to undertake any further quantitative easing purchases when it concludes its Monetary Policy Committee meeting on Monday.

On the commodities front, oil has taken a huge hit in recent weeks.

OPEC may call a meeting if crude takes another tumble, according to Kuwait's oil minister Sheikh Ahmad al-Abdullah al-Sabah. "Sixty-five dollars would ring a bell ... and a meeting," he told reporters before an Arab Energy Conference in Doha, Reuters reported.

US crude oil futures settled at US$75.11 a barrel on Friday, posting their largest weekly loss in almost a year and a half, according to Reuters data.

The biggest political issue this week is what will happen in the wake of the inconclusive national elections in the UK.

Conservative and Liberal Democrat leaders will hold talks on Sunday, but are unlikely to agree on a new government before markets open on Monday, the Conservatives said.

The centre-right Conservatives won most seats in Thursday's parliamentary election but fell short of a majority and are seeking the support of the smaller Lib Dems to end 13 years of Labour rule.

Investors will be looking to US Federal Reserve Chairman Ben Bernanke to soothe their fears when he speaks during the week at a conference in Philadelphia.

Whether Bernanke provides the clarity investors are seeking is unclear. For travellers awaiting flights in northern Portugal and Spain, clearer skies rank as a higher priority.

Businesswire.co.nz

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