Greek Tragedy For Euro

By Fabio Alves

It’s been a bad day for the euro as nerves over Greece’s fiscal woes continue to fray. The euro hit a session low of $1.4252 Tuesday while also struggling against other currencies.  The single currency plunged despite comments from Greek Finance Minister George Papaconstantinou, who said that the other 15 euro-zone finance ministers had welcomed Greece’s plans to slash its budget deficit.

Nerves over Greece are proving surprisingly persistent. Analysts at BNP Paribas, who have held a negative view on the euro for some time, said the issue could push the euro even lower against the dollar than they had initially expected.  “The developments in Greece have deteriorated far more quickly than we originally anticipated, and the risk is now that the euro undergoes a more rapid
decline [against the dollar], exceeding our already bearish expectations,” the bank said. The bank’s forecast is for the euro to trade at $1.38 against the dollar by the third quarter of the year.

John Taylor at FX Concepts says the euro may record its second-biggest year-on-year loss agaisnt the dollar since it began trading in 1999: he expects the euro to end the year at $1.25-$1.30. That would be a decline of 12.7% from end-2009’s $1.4321–the biggest drop since 1999, when the euro fell 14.3% against the dollar, according to data from Forex.com.

According to Taylor, domestic and international events could conspire against the common currency this year. Mounting credit concerns over Greece and the fiscal health of some of the other weaker member states, such as Portugal, will pose domestic challenges for the euro. A faltering economic recovery in the U.S., meanwhile, will serve to support the dollar and undermine demand for the
euro.

“We really have a test for the euro coming,” said Taylor in an interview with Dow Jones Newswires. 

The New York-based firm, which has $7.8 billion in assets under management, is regarded by money managers and foreign exchange experts to be among the world’s biggest hedge funds dedicated purely to currency investments. Its Global Currency Fund lost 17.9% in 2009, after gaining 11.49% in 2008.

“I’m pessimistic. I don’t think 2010 will be a plus year for the U.S. economy,” Taylor added. “A recession is really good for the dollar.” Similarly to what happened in the wake of the global financial meltdown in 2008, uncertainty about the global economy will prompt investors to seek refuge
in the greenback.