Forex News: Euro Drops to Two-year Low on Continued Uncertainty over ESM Implementation

Jul 12 • Market Analysis • 1752 Views • Comments Off on Forex News: Euro Drops to Two-year Low on Continued Uncertainty over ESM Implementation

One of the most disturbing pieces of forex news in recent weeks was the announcement that the euro had fallen to a new two-year low against the US dollar as the Euro Zone crisis continued to weigh on market sentiment. The EUR/USD fell to 1.2234 in US trading while EUR/JPY fell to a five-week low of Y97.20. Meanwhile, the EUR/GBP fell to 0.7892, a three and a half year low and the lowest level it has reached since November 2008.

Forex news analysts believe that the euro would continue to be under pressure since market sentiment is expected to remain bearish due to the delayed verdict of the German Federal Constitutional Court regarding the legality of Germany’s role in implementing the European Stability Mechanism (ESM) and the fiscal agreement for implementing budget discipline in the Euro Zone. The ESM is the permanent bailout fund of the Euro Zone and has a maximum of €500 billion in lending funds. Under the agreement establishing the ESM, the fund would have an initial lending capital of €80 billion in cash, which would be paid out by the Euro Zone governments in installments of €16 billion over the next few years while the remaining €420 billion will be paid out as required. The mechanism replaces the European Financial Stability Facility, which had earlier approved bailouts for Greece, Ireland and Portugal.

The German Constitutional Court could take up to three months to rule on the ESM and the fiscal pact and is seen as likely to set conditions for its approval that could include demanding that a referendum on the measures be called. The German parliament has already approved the measures although the Italian parliament has not yet ratified the agreement. The parliaments of all seventeen Euro Zone nations need to approve the deal before it can be implemented. However, Eurogroup president Jean-Claude Juncker expressed optimism that an initial €30 billion installment to the ESM will be paid out by the Euro Zone governments by the end of July. The ESM was originally supposed to take effect on July 1.

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Further adding to the bad forex news, the Eurogroup meeting of the region’s finance ministers came out with a one-page statement in which they said technical discussions on the future ESM will only start in September. The statement was met with concern by investors who were already concerned about the long delay in implementing the ESM.

Also weighing down market sentiment on the euro was the announcement by Italian Prime Minister Mario Monti that the country may ask for funds from the ESM to buy back Italian bonds as yields continued to rise and pressures in the financial markets continued to broaden. This piece of potentially worrisome forex news, however, was moderated when Monti stressed that the country would not need a wide-ranging bailout similar to what was given to Greece and Portugal.

In related forex news the GBP/USD fell to a new low in New York trading following a statement by the Bank of England Governor Mervyn King that the economy of the UK was showing few signs of impending recovery. The UK pound fell to 1.5477 against the dollar.

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