The euro was worth $1.34, down 2 cents from Monday’s close, after German chancellor Angela Merkel said in a speech that the European Union’s plan to bail out Ireland puts the European currency in “an extraordinarily serious situation.”
Yet the euro has lost 6% of its value against the dollar since hitting a recent high Nov. 4, the day Fed chief Ben Bernanke published his explanation of the Federal Reserve’s decision to buy as much as $600 billion worth of Treasury bonds over eight months to boost U.S. demand for goods and services.
One reason for Tuesday’s dollar rally is that a stronger-than-expected revised gross domestic product report shows the economy expanded more than expected in the third quarter, potentially easing pressure on Bernanke to follow through on his promises.
“Good U.S. data … is good for the U.S. dollar as was proven after last week’s Philly Fed survey, as data weakens the case for buying the entire $600 bln in QE2,” CMC Markets strategist Ashraf Laidi wrote in a note to clients.
The euro has tumbled amid worries that a bailout of Ireland, being arranged in part to prop up the country’s hemorrhaging banking sector, will make it necessary to rescue Portugal as well.
A rescue of Portugal wouldn’t break the bank, but observers worry that much bigger Spain – whose staggering economy accounts for a tenth of euro zone economic output – could come next. Merkel and others have been arguing that taxpayers shouldn’t have to foot all these bills, but efforts to get bondholders to pay their share haven’t gone down easily.
Schauble said Tuesday the fate of the euro is “at stake” in the Irish bailout. Accordingly, some observers say there are signs the euro selloff is only just getting started.
John Higgins at Capital Economics writes that the Bernanke backlash selloff of the dollar seems to have run its course. That gives investors much more time to consider Germany’s uncertain role in supporting the euro project, and to mull over how many chances they really want to be taking between now and year-end in a world economy whose outlook isn’t likely to clear up any time soon.
“We expect the euro to lose ground as investors’ enthusiasm for risk begins to wane,” he writes in a note to clients Tuesday. “Not only is this likely to be partly triggered by growing anxiety about the euro-zone’s fiscal crisis itself. But the boost to asset prices from the Fed’s adoption of additional monetary stimulus should also fade, if it hasn’t already.”