Flurry of Worry About Greece Drives Euro Lower
A flurry of worry about Greece's debt struggles drove the euro lower, and put investors on alert ahead of the weekend.
The single currency began to wilt even before a Fitch credit downgrade and recycled two-day-old news story about Norway holding back grant money from Greece circulated mid-morning New York time.
Comments from the Bundesbank earlier Friday that it expects slower German growth after a first quarter surge helped send the currency lower.
"It had a lot of life to it, sort of like a pinball going around a pinball machine. You had the downgrade and Fitch talking about how a voluntary restructuring in fact would be a default. Also I think the things were individually incidental, but on a day where there is a pretty good vacuum of other information, it probably took on a lot more significance and got some momentum going on the downside," said Robert Sinche, head of global currency strategy at RBS.
The euro is also reflecting concerns ahead of Spanish local and regional elections this weekend. "It's going to be a loss for the socialists. The new governments will quickly inherit more deficits than the outgoing group owned up to," said Marc Chandler, chief currency strategist at Brown Brothers Harriman.
Chandler said the euro's sell off comes after the currency set a series of highs this week and it stopped at a technical level above 1.43. The euro touched a low of 1.4140 on the day but it is still higher on the week. There had been expectations of some resolution of Greece's debt issues, and one plan that was floated would extend the duration of the debt.
Bundesbank chief Jens Weidmann, however, said if Greece were to extend the durations on its bonds, that would make it impossible for the ECB to accept them as collateral in lending operations.
"What a lot of people thought was that the Monday/Tuesday (EU) summit was to resolve the Greece situation...The summit was really more about ratifying Portugal and buying time until the EU and IMF complete a scheduled check up on Greece," he said.
Sinche said he does not expect any real developments around Greece until June, after the IMF report and ahead of the June 20 finance ministers meeting and the June 24 EU leaders meeting in Brussels.
Fitch Friday lowered its credit rating on Greece to B-plus from BB-plus and noted the need for more austerity measures. Meanwhile, France's Finance Minister Christine Lagarde warned Greece is at risk of default if it doesn't do more to put its fiscal house in order.
The other headline that caught the market's attention was about Norway withholding $42 million in grants to Greece because it said it violated terms of the pact. The grant is part of Norway's contributions to EU states under the European Economic Area agreement.
When the euro hit its lows Friday, the S&P 500 was down nearly a percent and other risk assets, like oil , also sold off. But those markets have stabilized and retraced losses.
"The biggest lesson of today is the decline in risk assets was relatively subdued and the recovery we've since seen in a number of assets would tend to suggest that the positions just aren't that big so you're not getting this cascading capitulation of exposure," Sinche said.
He said that in part was the result of the recent correction of commodities. "Sometimes the markets tell you as much as anything," he said.
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