Markets Nervous Over Record Spreads
The euro surrendered earlier gains on Wednesday as Greek bond spreads reached record levels. The euro hit a twelve day low against the US dollar and bond spreads rose to over 500 basis points. Most economists believe that Greece will ask the EU and the IMF for aid in the near future. Germany’s economy minister said that IMF aid could total 12 billion euros but added that the EU and the IMF should wait to see if recently imposed austerity measures are effective. Paul Robson of RBS stated, “The FX market is nervous about widening sovereign spreads. The German minister’s comments on Greece look to be driving it.” Many economists now say that the European Central Bank will not start to raise rates until next year as debt ridden nations including Greece, Portugal and Spain struggle to contain massive debt. Euro Zone debt problems could also limit growth for the region. Many now believe that the US Federal Reserve will begin to raise rates as early as November. Chris Loong of State Street in Sydney stated, “This year, the market will focus on the different growth rates between Europe and the rest of the world, particularly North America and Asia, and that will weigh on the euro. Austerity packages and commitments by Greece and other European nations to tighten their belts could mean lower growth prospects.”
Greece’s Austerity Measures Fail to Convince Investors
So far this year the euro has fallen 6.3% against the dollar and last traded at $1.3422. A survey of 42 financial institutions by Bloomberg predicts that the euro will trade at $1.35 by June and will fall to $1.32 by the end of the year. The euro has fallen against most major currencies as Greece struggles to finance its debt. The government of Prime Minister George Papandreou has cut spending and wages and has raised taxes but these efforts have failed to convince investors as borrowing costs continue to hamper efforts to get the nation’s debt under control. The International Monetary Fund has warned that rising public debt has replaced financial industry stress as the biggest threat to global recovery and puts the world economy at risk.
Loonie Above Parity With US Dollar
The news was not all bad-The Canadian dollar rose above parity with the US dollar and traded at C$0.9931 to the U.S. dollar. The Loonie extended gains after the Bank of Canada signaled that a rate hike may take place in June. Adam Cole of RBC Capital Markets stated, “The Canadian dollar is rallying after the BoC dropped its conditional commitment not to move on rates. We have a near-term target versus the U.S. dollar of C$0.9800 and expect that to be reached pretty quickly.”
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