The euro dipped against the dollar on Tuesday as the bail–out deal for debt-ridden Greece was cautiously greeted by markets and investors. It dropped to $1.2922 following data that US consumer confidence has reached its highest level in a four-year period.
The single currency briefly held the psychologically important $1.30 level, its highest peak against the dollar since 31 October. A 13-hour meeting between the International Monetary Fund and the Eurozone finance ministers led to an agreement for reducing the Greek debt by 40 bn euro. On Tuesday, they agreed on a settlement that clears the way for Greece’s next aid disbursement in the amount of 44 bn euros.
Following the news, European and Asian shares increased their value – so did the euro.
Both the German Dax and French Cac 40 rose by 0.8% early on Tuesday, while the FTSE 100 was up 0.6%, offsetting losses from Monday.
MSCI's largest index of Asia Pacific shares outside Japan increased by 0.3% to a two–week high. Australian shares gained 0.7% while Kospi, South Korea's benchmark index, gained almost 0.9%.
Investors however, seized the opportunity to reassess the Greek deal’s outcomes during the early Asian trading session on Wednesday. The debt-laden country will comply with maturing obligations; concerns are triggered though by the lack of information on what measures the Greek government will take in order to reach its latest targets.
Many analysts commented on how the initial positive reaction has quickly turned into a more sober assessment and, reasonably, the euro failed to move above $1.30. Market makers observe that the Greek deal would be a short-lived relief due to harsh austerity measures which will put a pressure on the euro, especially against the dollar.
The eminent fiscal cliff crisis in the United States is another alarming issue for investors. Despite attempts of the Democrats and Republicans to achieve a certain compromise, an actual resolution is still to be made. If US lawmakers do not reach an agreement, spending cuts, tax increases and specific reduction in the budget deficit are scheduled to go into effect automatically. Referring to the issue, US Senate Majority leader also expressed his disappointment and concern at the lack of progress, which additionally worsened investors’ fears.
In early Thursday, the euro lost 0.1% against the dollar to $1.2947 during the late Wednesday US trading session. However, it stayed higher than its Wednesday intraday low of $1.2880, backed by investors’ increasing willingness to risk.
A fall in the 10-year Italian government bonds to their lowest level since February 2011 on Wednesday was another supportive factor for the euro, as it implies that investors’ concerns about sovereign debt crisis in the euro area are decreasing.
Optimism on reaching an agreement over ‘fiscal cliff’ talks caused an increase of the US dollar on Thursday, thus offsetting some losses in the previous session. That was additionally supported by President Barack Obama’s statement on hopes of reaching a settlement with Congress before Christmas.
Market makers and investors expressed their concern that the scheduled tax increase and spending cuts in the amount of approximately $600 bn, which are planned for early next year, would pose a serious burden on the recovery of the U.S. economy, with fears it might dip further into recession, putting additional pressure on the global economy.
A look towards the next couple of weeks shows signs of high volatility to be expected in the EUR/USD pair. It is usual that liquidity is low at this time of the year since more and more traders head for the holidays.
As reported at 08:45 GMT, the EUR/USD was trading at $1.2975, up by 22 pips to its opening price of $1.2953.
Source: DF Markets