Market Insider

Greece, Recession Fears Give Euro a Wild Ride

The euro rollercoaster is taking risk markets along for a wild ride Thursday, rising when there's apparent progress on Greece and swooning when recession fears return.

European Central Bank President Mario Draghi, in his first meeting, surprised markets with a 0.25 percent rate cut, denting the euro's morning gains. The single currency was further impacted by his comments warning of "slow growth heading towards a mild recession by year end." But the euro vaulted higher when a news wire late morning U.S. time quoted sources saying there would be no referendum vote in Greece.

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A rash of contradictory headlines were flashing at a frantic pace earlier in the session, as the fate of the Greek government remained uncertain at best.

Conflicting reports about the resignation of Prime Minister George Papandreou, who faces a confidence vote Friday, won favor with traders when they suggested that Papandreou was out. That is because he supported the public referendum, which traders fear could fail, threatening the country's membership in the euro zone.

Papandreou, in a speech later Thursday, offered to hold talks with the opposition to resolve the crisis, saying he could drop the referendumif the opposition backed the bailout deal in parliament. At the same time, the EU's bailout plan, which includes the bailout of Greece, is a key topic at the G20 leaders meeting in Cannes. Papandreou surprised European leaders with his announcement of the referendum, earlier this week.

The euro was at a high of 1.3829 at one point, and was at 1.3757 in late morning. By early afternoon, it was above 1.38, well off its intraday low of 1.365. U.S. stocks meanwhile surged on the open, then fumbled with mixed headlines from Europe and on Draghi's comments, but rebounded again, giving the Dow a triple digit gain. At one point, both the Nasdaq and S&P 500 were negative. The S&P 500 was up nearly a percent in late morning.

"You definitely have a skittish market," said a stock trader, who was watching the foreign exchange market, which was watching the European headlines.

Mary Nicola, BNP currency strategist, said it's impossible to predict the euro's end point Thursday, but that the market will eventually focus on the rate cuts in Europe. The benchmark rate had been 1.5 percent, raised recently on concerns about inflation, but also at a time when many economists had started to worry about the strength of the European economy.

"I think the market is going to start pricing in further rate cuts because if you look at some of the comments from Draghi, he talks about risks ahead for the economy," said Nicola.

The ECB was not expected to move yet on rates, and traders had been expecting a cut in December. The euro sprang higher Wednesday on speculation the Fed's could mean ease rates further in the future.

Brian Dolan of said Draghi threw out another comment that could be construed as euro negative, quoting the ECB president as saying that the central bank's bond purchases are limited and temporary. "I'm concerned the ECB is not going to be a more active player," said Dolan, who said after Greece is resolved the markets still could move on to concerns about Italy and Spain.

But for now, anything can happen as the Greek government faces collapse, against the backdrop of the G20 leaders meeting in Cannes.

"I think in general the euro is a better short against the crosses," Nicola said.

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