Euro rockets after Merkel compromises on Greece

At a Berlin meeting on Friday German and French leaders appear to have come to a compromise that would ultimately lay the groundwork for the next round of emergency IMF loans to Greece. Prime Minister Papandreou shuffled his cabinet Friday appointing a new finance minister along the way. Two pieces of news drove currency trading on Friday with a former Fed official predicting a U.S. recession resulting from an inevitable Greek default, while the news conference in Berlin took precedence and sent the euro surging.

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Euro – Alan Greenspan talking on Bloomberg’s Charlie Rose show warned that a default by Greece was almost certain and as such would likely drag the U.S. economy into recession. His prediction, while likely accurate, has been diluted on Friday on account of the positive words flowing from Berlin. German Chancellor Merkel said she’s willing to compromise on demands for bondholders to carry the burden and asks instead for purely a voluntary participation by private creditors. French leader Sarkozy said that such agreement requires the approval of the European Central Bank. Indeed the attitude of its President Trichet and company will be key here although investors have seized the opportunity to drive the single currency sharply higher. Earlier the unit slumped to $1.4127 before a moonshot lifted it to $1.4289. With the entire market watching and reacting to headlines, it’s important to understand that the end game for the ECB here is to avoid any situation under which any ratings agency would claim a default. The bid behind the euro following the Berlin conference is a market attempt to put words in the mouth of the central bank’s mouth.

U.S. Dollar – Of course a surging euro is at this point positive for risk appetite and is surrounded at the end of a choppy week for trading by a reversal in stock indices from Europe to North America as investors hope for a longer-lasting resolution to the crisis. The dollar basket has slumped by 0.5% with the greenback taking slingshots left and right from every other major unit. Data due for release Friday may show a rebound for economic activity over the coming three-to-six months. The Conference Board’s leading indicator for June should reverse last month’s dip as fears over supply bottlenecks resulting from the Japanese earthquake events unwind, while a welcome slide in fuel costs may also boost both sentiment and activity. A University of Michigan confidence index is expected to show little change in consumers’ mood.

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