In a previous post I wrote on January 22nd, I laid out my euro prediction for 2010 and voiced my opinion that the Euro will have a bad year. The factors I mentioned to support this view were:
1. A recovering US economy that makes the dollar more attractive.
2. Problems in the Euro-zone with some members such as Greece and Spain having serious debt with little prospect or repaying it any time soon.
3. An uneven distribution of wealth and varying financial conditions among the Euro-zone members.
At the time I wrote that prediction (which came true almost word for word), the Euro has just broken through what seemed to be a resilient support level at 1.4000$. Since that time, the Euro has continued to trail down and recently broke through the 1.2500$ level, showing a deep and fundamental weakness vs. the dollar.
Now, I believe it is time to freshen up my euro prediction for 2010 and tell you what I believe will happen during the rest of this year.
To put it simply, I believe that the trouble for the Euro are just beginning and although it has enjoyed a brief bounce-back from its most serious low of the year, the sentiment is still highly negative against the European currency.
Let’s see what is weighing down on the Euro:
1. Analysts seem to compete between themselves on how bleak the future will be for the Euro. Some predict that it will slide to a 1.1000$ value and others say it will equal the US dollar before this current crisis is done.
While I don’t put too much stock in what analysts are saying, other people do and the market will certainly be influenced by such talk.
2. The massive trillion dollar bailout package of the Euro-zone for Greece will likely weigh further on the Euro. Seeing how much it takes to bailout a small country like Greece makes it seem impossible to help bigger economies such as Spain if they continue to weaken.
3. The cracks in the political structure of the EU have shown themselves to be big and challenging, when rumors surfaced that the French President threatened to take his country out of the Euro if the bailout package would not be passed (something Germany seemed against). The solidarity to make tough decision and stick together seems to just no be there.
4. This brings me to the future of the Euro. The big question isn’t whether the Euro will recover but whether it will survive at all. There is a lot of talk about how weaker countries will need to leave the Euro altogether in order to improve their economy and for the Euro to bounce back. Check out my previous post about why a weak Euro may be in Greece’s interest.
In addition, there is so much anger against Greece and the other financially burdened countries that they may actually be kicked out. This won’t happen soon (and likely not in 2010) but it may happen.
All in all, 2010 seems a bleak year for the Euro.
