Two weekend press articles weighed heavily on the seemingly endless summer drought of positive news for the European economic region causing speculators to push the single currency through its June panic low and towards its weakest since May. The fact that the situation is spreading beyond the desperate hunt for a solution for Greece now has investors honing their attention back to the possibility that more powerful peripheral countries are in danger of default. Having kicked the can down the street with no success for so long, European officials are proving that they are close to running out of options. The question for investors becomes whether to remain exposed to any sovereign European entity in the face of mounting pressure across the region.
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Euro – The euro needed no distracting data on Monday. Such signs would only remind investors that not only is the central bank on a fast track to undermine inflation by tightening its monetary stance but also that there’s no way that Europe is about to grow its way out of the towering debt crisis. So far the euro has avoided a plunge below $1.4000 reaching $1.4029 at its lowest point, but has been sinking fast on two key media reports. Germany’s Die Welt newspaper reports that an unnamed ECB official warned that it wants to double the bailout fund to €1.5 trillion in the event the Italian government falls victim to the crisis. Britain’s Financial Times claims that European officials are on the brink of accepting at least a partial Greek default as a necessary evil in order to move to a lasting solution that would permanently reduce and make for a manageable amount of debt. The euro fell by 1% against the British pound and twice as much against the Japanese yen while it is down by almost that amount against the Swiss franc in what many regard as a litmus test for the stability of the region.
U.S. Dollar – The dollar index was propelled 1% higher as investors boarded the life raft in search of higher ground. Many see the dollar as potentially weak as the euro given the towering budget deficit and political gridlock in Washington presenting the potential for a sovereign debt default of its own. However, for now most regard the political shenanigans as little more than brinksmanship that will find resolution before an early August deadline. The U.S. economic calendar is hectic this week although blank to commence the week. FOMC minutes will be closely-watched for possible hints by its members regarding the potential or otherwise for further quantitative easing. Investors will also watch for signs of amelioration in inflation trends within both producer and consumer price reports. The week also delivers the latest health check for the consumer in the June retail sales report.