Dollar Gains as Euro Temporarily Hit by Debt Crisis Woes
The euro may be down, but it's not out.
The euro was weaker Wednesday morning on a trifecta of concerns. First, the expectation that Portugal's government will crumble after its parliament rejects an austerity budget raises the prospect the country will become the third in the euro zone to need a bailout.
Then there is the worry that Ireland needs more capital to fund its banks, and finally the much awaited European Union leaders summitThursday proved disappointing before it even got started.
EU leaders put off voting on the expansion of a funding mechanism until June, despite the promise of a full package of measures at the two-day summit. Draft conclusions for the summit show that the EU leaders have postponed a final vote on the measures until June, according to news reports.
"The fact that they pushed that down the road for another three months is not a positive for the euro," said Boris Schlossberg of GFT Forex. "It seems that despite reports earlier to the contrary, there seems to be lots of disagreement among the parties on the terms and conditions that have to be met.
But the euro's slide is likely to be temporary because the currency is still supported by the promise of a rate hike when the European Central Bank next meets on interest rates April 7.
ECB President Jean Claude Trichet Monday reinforced his earlier comments that a rate hike is possible in April, indicating that global events have done nothing to change his thinking.
The euro was trading at 1.4130 at mid morning New York time, after earlier dipping to 141.08. "In order to really feel like the market is thumbs down, we'd have to go through 1.40," said Marc Chandler of Brown Brothers Harriman.
The EU leaders meet just after Portugal Wednesday was expected to reject an austerity budget. Prime Minister Jose Socrates has threatened to resign if it fails.
"They're just not increasing the effectiveness of the EFSF (funding mechanism). It didn't really matter because they still have enough to bail out Portugal and give Ireland more money," Chandler said.
Chandler said the rate hike that the ECB has promised will in turn hurt its weakest members as countries like Ireland, Portugal and Greece grapple with higher rates.
"Everything said and done, the euro still seems fairly resilient. It's holding 1.41," Chandler said.
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