Euro Continues to Slide Against the Yen

by John M. Curtis
(310) 204-8700

Copyright Janaury 3, 2012
All Rights Reserved.                                         

                Once considered a replacement to the U.S. dollar for the world’s reserve currency, foreign exchanges continue to short sell the euro, driving its value to new lows.  While no one knows what the future will hold, sovereign debt problems in the Eurozone assure that the euro’s three-month moving average continues to plummet.  Without a comprehensive fix in the Eurozone resolve sovereign debt problems, there’s no end in sight to the euro’s nosedive.  While its still not at parity with the U.S. dollar, traders continue the bet against the euro further eroding the currency’s value.  Celebrating its 10-year anniversary Jan 1, the euro showed more weakness hitting a decade low against the Japanese yen at 98.71.  While the euro’s holding its own against the U.S. dollar at 1.28, its continued weakness marks an impasse at the European Union and Eurozone to manage its growing sovereign debt problems.

            Eurozone leaders, especially Germany and France, have no intention of chucking the euro, despite the inevitability.  Eurozone l economic leaders believe ending the euro would have catastrophic damage to Eurozone economies.  Expected losses from reverting back to native currencies keeps a steady flow of propaganda about fixing the Eurozone’s sovereign debt problems.  “There’s still a lot of pressure on the euro due to concerns about the refinancing needs of some Eurozone Countries in the first quarter,” said Arne Lohmann Rasmussen, head of currency research at Copenhagen’s Danske Bank.  Rasmussen points to the insoluble dilemma in the Eurozone:  No sovereign nation can beg, borrow and steal from the Frankfurt-based European Central Bank to get out of debt.  Borrowing more cash from the ECB has left Eurozone countries worse off with more sovereign debt.

            Since the euro is traded on most foreign exchanges, it’s subject to the constant ups-and-downs of a globally traded currency.  Unlike the yuan whose value is fixed by the Chinese government, the euro is subject to constant market fluctuations.  Without an ECB fix to the Eurozone, no cash-strapped European economy can endure more high-interest indebtedness without punishing cuts to social welfare and pension benefits.  Led by Germany and France, the Eurozone keeps asking its cash-strapped neighbors for more interest.  “This is driving many to safer assets and currencies, like the Japanese yen,” said Rasmussen, accounting for why currency traders are dumping euros.  If the euro, like the yuan, were government controlled, there’d be no exodus from the currency.  Hedge and private equity funds that deal in currencies are ready to short the euro where it seems trendy and profitable.

             European policy-makers in Brussels couldn’t agree on how to solve the Eurozone crisis except by forcing struggling economies into more debt.  German Chancellor Angela Merkel and French President Nicolas Sarkozy want a modification of the European Union constitution that demands standard levels of debt, with draconic penalties.  Merkel and Sarkozy know that more penalties doesn’t solve the problem for struggling countries, like Greece, Italy, Spain, Portugal and Ireland, all of which have massive public debts to finance pension and health care benefits to state workers.  All indications point toward more weakness in the euro as EU policymakers decide how to restructure the Eurozone’s sovereign debt.  Most countries want the ECB to incur the debt to bailout currently cash-strapped economies.  Now that the euro’s dropping in value, it becomes a more workable common currency.

            As the euro’s 1-year anniversary passed quietly Jan. 1, the promises of more prosperity in Europe haven’t been redeemed.  Without coinage and currency printing rights, it’s difficult for sovereign nations to cover mounting debt.  Borrowing more cash from the ECB carries with it more risk and interest to payback the Frankfurt-based central bank.  Unlike the U.S. that relies on a common tax base, the Eurozone has no common tax pool from which to pay nations’ debt obligations.  If the European common currency were to work, it would require each Eurozone country to relinquish sovereignty, defer to the EU and create a common tax base.  As long as there’s no real fix, the euro will continue to lose its value relative to other international currencies.  If the European slowdown turns into recession, the ECB will be forced to slash interest rates, further eroding the euro.

            Looking into a crystal ball, the Eurozone faces some real pressure to resolve its sovereign debt problems.  Officials at the ECB must accept their role of providing liquidity to Eurozone governments and banks.  If the euro continues to plummet, the Eurozone must face the music and convert euros back to native currencies.  Converting back to native currencies would create an initial shock but would eventually reassure nervous markets.  Officials at the ECB worry about hyperinflation, should they print more money and bail out cash-strapped Eurozone economies.  “We remain a sell on rallies (with the euro) as we tend to think the Eurozone crisis will actually get worse before it gets better,” said FOREX.com’s research director Kathleen Brooks, hinting that may not survive too many more sell-offs.  Eurozone leaders must deal with the sovereign debt crisis or risk losing the euro.

  John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.       

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