The odds may be long that Greece leaves the euro, considerably less that the ECB will start quantitative easing soon and no better than even that the Fed will begin to raise rates by June.
The speculation on any one of these events would be enough to put the euro on the defensive. All three in one market have produced the weakest euro since the original European debt crisis in 2010. Join them to a floundering world economy, collapsing oil prices and a flood of investors seeking the relatively heady returns of U.S. Treasuries and the potential scope of the euro's decline stretches into the first quarter and beyond.
The euro plunged to an almost nine year low against the dollar at 1.1864 yesterday in the first few minutes of Asian trading as stop loss selling and poor liquidity exacerbated the currency's losses. Though it recovered in the European session, the currency never approached the important 1.2000 level, topping at 1.1976 before slipping again to 1.1887 just before the New York open.
Mario Draghi, the President of the European Central Bank, for one, should be pleased with the euro's fall. He has repeatedly cited the strength of the euro as a drag on the European economic recovery and inflation.
A weaker European currency will help continental exporters compete by making their products cheaper overseas and raise domestic inflation by making imports more expensive.
The central bank is widely thought to be considering a plan to buy sovereign European assets, perhaps as soon as the January 22nd meeting, in an effort to revive the stagnant eurozone economies.
With European interest rates at the zero bound there is no other way for the bank to further lower rates than to intervene directly in the credit markets, buying assets and forcing rates down. The ECB's main refinance rate is 0.05 percent and the commercial deposit rate is -0.2 percent.
Inflation in the euro zone was 0.3 percent year over year in November, far below the ECB's 2 percent target and the lowest non-recessionary rate on record. It is predicted to fall to -0.1 percent in December. European prices have been declining for more than three years after peaking at 3.0 percent in 2011. CPI data for the EMU for December will be released on Wednesday.
German annual inflation weakened sharply in December, slipping to 0.2 percent from 0.6 percent in November. Disinflation has been eroding prices in Europe’s largest economy for more than three years. The latest figures make it likely that the EMU as a whole slipped into deflation in December as forecast and may have eased German objections to an ECB debt purchase plan.
The German news magazine Der Spiegel reported over the weekend that Angela Merkel's government is ready to let Greece drop out of the euro if that is their choice. The government denied the report saying it hasn't changed its positions on Greece.
Greek Prime Minister Antonis Samaras was forced to call a general election for January 25th after his government lost a third presidential vote in parliament. His New Democracy party trails Syriza, the largest opposition party, in polls.
Syriza's leader Alexis Tsipras has said that he will demand that the Europeans renegotiate their bail out agreements with Athens. Germany and others have said that the deals must stand exciting fears that Greece will be forced out of the euro. Mr. Tsipras says he wants Greece to remain within the euro, but many investors are concerned that the confrontation and rhetoric, if Syriza wins the elections, could spin out of control.
The Athens stock market has lost roughly 15 percent of its value over the past month.
Chief Market Strategist
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