Euro Edges Higher on German Economic Performance
The euro edged a bit higher against the U.S. dollar and the Japanese yen on Tuesday, following data suggesting Germany's economy remains strong and encouraging signs that the worst case scenario might be averted in Greece. At the moment, the euro added 0.175% against the greenback to stand around $1.4315. At the same time, the European currency rose 0.055% against the Japanese yen and trades around ¥115.66.
Traders are encouraged that the latest data shows the German economy remains strong, as Germany's consumer climate index rose from 5.6 in May to 5.7 in June, when most analysts had predicted a slight fall to 5.3. Germany is the Eurozone's largest economy. At the moment, Germany also has one of the strongest economies in Europe. Strong consumer confidence is, therefore, a sign that Germany will remain the locomotive driving the European recovery forward.
Good news from other parts of Europe are desperately needed ahead of the crucial parliamentary vote in Greece that will decide if Greece will be forced to declare bankruptcy or not. Prime Minister Papandreou is fighting hard to gather support for yet another round of austerity cuts aimed at lowering the country's massive debt levels. He faces, however, a growing dissent among the members of his own party, with the main opposition party already signalling it will not support the government's bill.
Even more important, it seems PM Papandreou has lost the support of the Greek people. The unions have declared yet another strike which is paralyzing the country. It is worth reminding that the high tourist season has began and flight cancellations and protests are not sending a very good message to potential tourists. Greece relies a lot on the performance of its tourist industry and domestic unrest has the potential to significantly reduce the number of tourists in Greece and, thus, undermine the recovery of the country's flagging economy.
The latest research also suggest between 70% and 80% of Greeks do not support the latest austerity drive. The Greek people disapprove of the government's attempt to, among other things, impose income taxes on people earning minimum wage. Very low support for the government's program should worry traders as even the best plan can fail if the people deliberately try to sabotage it. It seems that this might be the scenario in store for Greece.
The Greek government desperately needs some support from outside, when it seems it cannot find it in Greece. It looks as if the French are coming to its rescue. President Sarkozy has said French banks are willing to extended the payment deadline for the Greek debt to 30 years. French banks have the highest exposure to the Greek debt and would be the biggest losers if the Greek parliament votes against the government's austerity program. The latest move by the French can also be interpreted as an attempt to swing the public opinion in Greece more in favor of continuing with painful reforms. The French are sending a signal to the Greeks that they are willing to accept some of the costs of the Greek crisis, reassuring the Greeks that they are not alone in this mess. How successful this proposal would be remains to be seen.
Some analysts believe Greece is not defendable. Regardless of massive loans from the EU and the IMF, and in spite of the efforts by the European banks, at the moment just French banks, to bare some of the costs of the crisis, Greece will be forced to leave the Eurozone sooner or later. The Eurozone currently does not have any mechanisms in place to accommodate such a scenario and the Greek default would most likely create enormous pressure on Ireland, Portugal and Spain. The Greek default could easily start a domino effect with other Eurozone members soon forced to abandon the single European currency. Traders who believe in this scenario will be interested in the Market Vectors Double Short Euro ETN (NYSE: DRR) and the ProShares UltraShort Euro ETF (NYSE: EUO).
Other traders will interpret the latest move by the French as yet another sign that the Europeans will do whatever it takes to save Greece from bankruptcy. At the same time, the German economy remains strong, providing hope that Europe's biggest economy will be able to lift the economies of the Eurozone periphery out of the crisis as well. There is a long way until the debt crisis in Greece is resolved, but ultimately the Eurozone will survive this test. Traders who find appeal in this scenario will be interested in the WisdomTree Dreyfus Euro Fund (NYSE: EU), the EUR/USD Exchange Rate ETN (NYSE: ERO), Market Vectors Double Long Euro ETN (NYSE: URR).
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