Greece downgraded; euro up on Merkel comments

Moody’s latest ratings downgrade for Greece brings the nation’s credit-worthiness to the same level as Cuba and puts default as likely as the outcome of a coin toss. For an advanced European nation whose mainland peninsular is brimming with BMWs, that’s quite some feat and one worthy of a fine Havana cigar. Quite how the mandarins in Brussels failed to see through the nation’s books at the outset – well that’s another story. Today German Chancellor Merkel speaking in Singapore reaffirmed her nation’s commitment to the single currency and pointed to the nature of the debt crisis as opposed to a euro crisis, even claiming that sometimes the single currency is so strong that it shrouds Germany’s export prowess.

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Euro – The euro found the wind beneath its wings following Merkel’s observations and was lifted after ECB President Trichet suggested a Eurozone finance ministry to take a tougher stance on bailout nations who struggle to implement remedial fiscal measures. Under those circumstances, suggests Trichet, intervention by a regional finance ministry would provide “a much deeper and authoritative say in the formation of the county’s economic policies.” It seems that investors have found solace in the words of European leaders late in the week. The euro advance to a three-week high buying $1.4486 at best on Thursday. Ms. Merkel earlier stated, “The economic and monetary union has to be a community of joint responsibility. It is our joint interest to tackle the structural weaknesses of individual countries forcefully and effectively.”

U.S. Dollar – The fact that investors are warming to the prospects of a deal for Greece that is likely to see it fall into legitimized default, has detracted from the safe haven flavor of the dollar. There is a reasonably strong likelihood that should Friday’s employment report confirm labor market weakness, global interest rate expectations will continue to be pared, which would work in favor of the dollar. In a speech delivered in Tokyo, Fed Vice Chairman Janet Yellen said that, “the current accommodative stance of U.S. monetary policy continues to be appropriate because the unemployment rate remains elevated and inflation is expected to remain subdued over the medium run.” However, as the drama surrounding Greece subsides investors are warming to the appeal of the euro in hopes that the ECB will soon be able to kick the machine back in to rate rising gear. The dollar index is weaker by 0.7% at its lowest in four weeks ahead of initial claims data and an April reading of factory orders.

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