Hungarian Blues

Hungary may not be a member of the European Monetary Union -- those 16 countries of the 27 member European Union that use the euro -- but its policies can certainly affect the united currency. The euro dipped below 1.2000 against the dollar for the first time since late March 2006 in New York afternoon trading. The primary cause of the fall was comments by a Hungarian Government spokesman for newly installed Prime Minister Viktor Orban. Peter Szijjarto said, “It’s clear that the economy is in a very grave situation. I don’t think it’s an exaggeration at all” to talk about default.

In a normal world, such a comment would apply largely to the Hungarian currency the forint, which has fallen more than 4% against the euro since Wednesday.

Some commentators have noted that the Hungarian government, whose public debt is at 78% of GDP, less than several members of the EMU, has asked for and been denied approval to widen its budget deficit. They see these comments as a way to pressure the EU into granting permission. But the real pressure on the euro comes from the continuing sovereign debt problems in Greece, Spain, Ireland, Portugal and Italy. Without these precursors the Hungarian threat would be nothing more than a small thundercloud over the Carpathians.

Joseph Trevisani is the Chief Market Analyst for FX Solutions,LLC

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