Euro’s slide likely to resume despite pro-bailout trend

LONDON: It is hard to see the result of Sunday’s Greek election as a shot of adrenaline in the arm for the euro. A grind lower against the dollar looks inevitable.
The euro should arguably be heading back down to at least the mid-$1.24s seen last week.
Relief over Greece was short-lived. The euro hit a one-month high of $ 1.2748 in Asian trade but quickly pared gains as peripheral euro zone government bonds yields rose.
Only the possibility that the June 19-20 US Federal Reserve policy meeting might hint at some further monetary easing, which could weigh on the dollar, may be staying the hand of potential sellers of the common currency.
But euro sellers might not have the luxury of being able to wait for the Fed to announce its policy decisions on Wednesday.
The Greek election may produce some form of a pro-bailout government dominated by the center right New Democracy party bolstered by the socialist PASOK grouping, but with only 42 percent of the vote, it was hardly a landslide.
Indeed, if it were not for the fact that Greece allocates an additional 50 parliamentary seats to the first-placed party, these two parties would be unable to build even a slender majority in the 300-seat Greek legislature.
Already German officials have said Foreign Minister Guido Westerwelle’s comment that Greece may be given extra time with its reform program is not Berlin’s agreed government line.
The bond markets delivered an initial thumbs down on Monday, targeting the wider euro zone periphery and showing signs of concern at Spain’s economic predicament.
Even as Bank of Spain data showed that Spanish banks’ bad loans hit 8.72 percent of their outstanding portfolios in April, the highest for eight years, the yield on 10-year Spanish paper rose to 7.14 percent.
Greece, Ireland and Portugal were forced to seek international bailouts soon after their 10-year bond yields surpassed 7 percent.
Italian 10-year yields rose 15 bps to 6.08 percent.
Data emanating from the euro zone core does not offer much comfort either.
Thursday’s Dutch retail sales data saw a whopping 8.7 percent fall year-on-year.
Even Germany, the euro zone’s economic behemoth, has been feeling a chill from the euro zone’s crisis.
German imports tumbled at their fastest rate in two years in April and exports fell.
That latter fact might illustrate a wider point.
The euro zone arguably still needs a lower euro to support export potential to markets outside the currency bloc.
If traders do indeed conclude that the wider political and economic circumstances in the euro zone justify a weaker euro, those sellers could be doing the bloc a favor.
Selling the euro back down to $ 1.2450 or lower might be an act of kindness as well as a potentially profitable trade.
— Neal Kimberley is an FX
market analyst for Reuters. The opinions expressed are his own.