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After the largest one-day rally for the last eight months, the euro dropped on Monday. Part of this drop can be attributed to the markets readjusting to more realistic levels. Following the euro’s strong showing on Friday, the euro falling from its euphoric high is an expected event. The high levels it reached were unexpected and not justified by the economy in Europe.
The Summit on Friday
Early Friday morning, leaders of the European Union left the Eurozone summit with their short-term debt proposal in hand. Debt stricken nations in Europe would now be eligible for access to a rescue fund. This fund would buy up the nation’s bonds so the country does not have to follow strict austerity measures. After the irrational exuberance following Friday’s showing, the euro fell in early trading today to more sustainable levels. Currently, the euro has fallen a total of 0.3 percent to reach $1.2621 against the dollar. On Friday, the euro was at a high of $1.2693.
The European Central Bank Meets
The euro may have a rough time in the next few days. On Thursday, the European Central Bank will set the interest rate. Investors believe that the European Central Bank may cut the interest rates by up to 0.75 percent. If the interest rate is cut, the euro could fall against a basket of currencies.
Yen Gains Against Euro and Dollar
Against the yen, the euro dropped 0.3 percent as well and reached a level of 100.69. Across the pond, the United States dollar is at roughly the same levels against the yen. Last week the greenback hit a two-month high of 80.63 yen. Early on in this week’s trading the dollar was holding steady at 79.78.
Factories Slow in China
On Sunday, China released its data about factory growth. According to the report, Chinese factories have suffered from an economic slowdown. In June, these factories reached a seven-month low. The market is still awaiting manufacturing data from the United States and Europe for the month of June. A downturn in growth could indicate a stalled economic recovery.
United States Manufacturing Reports to Come Out
Surveys of manufacturing in the United States and Europe show that investors can expect manufacturing data to be negative. This economic downturn could be alleviated, but government officials are afraid to take action with the United States. As the United States approaches the November presidential elections, elected officials cannot make policy decisions that could negatively impact their party.
To make matters worse, the Federal Reserve decided in June to not issue any quantitative easing measures. Ben Bernanke vowed to step in if needed, but was not ready to take any new measures yet. Instead, Bernanke chose to continue the Fed’s Operation Twist.
With a tough second quarter coming to a close, United States Treasuries seem to be one of the top winners. Emerging market currencies and bonds also have performed well in the past month. United States Treasuries are currently being exchanged at 6.8 percent. Over the entire second quarter, the United States dollar rose 4.8 percent when compared to a basket of currencies.
Concerns about Growth
All of the data coming out this week in the United States is trumped by the release of the nonfarm payrolls for June. On Friday the United States government will release the most recent reports. Economists currently foresee a rise of about 90,000 new jobs. Although this is less than ideal, it would indicate that the economy is at least maintaining its present level. If the jobs report shows a creation of 90,000 new jobs, the unemployment will remain effectively unchanged at 8.2 percent.
Bank of England Fiscal Easing
It has not been announced yet, but many analysts expect that the Bank of England will be announcing a fiscal easing policy this week. The limited easing should amount to about 50 billion pounds in government bonds. The Reserve Bank of Australia is expected to just keep its interest rates at 3.5 percent when it meets on Tuesday. Australia recently cut its rates in the month of May and June. If the economy further deteriorates, Australia’s central bank might choose to cut interest rates further in future months. As long as the economy remains on track, the interest should remain unchanged.