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The debt crises in Europe have caused the euro to continue to slide against the dollar. The largest region in Spain, Catalonia, has asked for help in paying their bills from the Spanish government. Over in Greece, new elections are scheduled in just a few weeks. Investors are worried about the increasing likelihood of a Greek exit from the European Union and a default.
Amidst the instability of the European Union, currency traders are fleeing from the shaky euro and seeking refuge in safer currencies around the world. Currently, the euro has fallen to two-year lows. After the plea for help from Catalonia, Spanish and Italian bonds were sold off while equities dropped. The issues going on in Catalonia imply a greater instability in the market. Spain has already announced a higher debt amount than previously speculations had predicted. The fourth largest bank, Bankia, is also seeking assistance from the Spanish government.
On Friday, the euro slipped 0.2 percent. It is currently at $1.25116 compared to the dollar. Over the course of the last month, the euro has fallen a total of 5.5 percent against the dollar and is coming out of its fourth consecutive week of losses in a row. The euros most record low occurred in 2010 and totaled $1.1875. If the euro’s value continues to fall, the euro will be on pace to break the record.
Issues with the Spanish banking sector, a lack of strong policy measures and uncertainty over the Greek elections have all fueled the recent slide in the euro. Two political parties in Greece are currently in a fight over the majority of seats in their legislature. One party supports austerity measures while the other party is in favor of a default and exit from the European Union. Both parties seem to have equal levels of support among the population which has only served to increase investors’ speculation over the potential outcome.
The euro managed to perform slightly better in comparison to the Swiss franc. It remained flat to finish at 1.2008 after reaching 1.2075 on Thursday. Speculation exists over the role of the Swiss National Bank in managing prices. Currently, the Swiss National Bank has taken measures to ensure that the floor of 1.20 francs is protected. Investors are using the options market to bet on this floor being breached if the debt crisis increases within the European Union.
Switzerland has been working to figure out contingency measures for if the euro collapses. It does not believe such measures are necessary currently and the head of the central bank has already stated that they plan on supporting a cap on the franc. During times of economic duress, the Swiss franc is viewed as a safe haven for investors. With debt issues piling up in Europe, investors have been attempting to flood Swiss banks with investments. This drives up the cost of the franc. In an effort to keep the cost of the franc low, Switzerland has been buying up euros to make the franc a more favorable currency.
In the 1970s, Switzerland used negative rates on foreign deposits in an attempt to weaken the franc. This method was unsuccessful in cooling the nation’s currency so Switzerland is searching for other measures to weaken their currency. The stronger currency has negatively impacted the nation in the last few months. The tourism industry and a host of exporters have taken a loss over this time. Business leaders and corporations within Switzerland have urged the Swiss National Bank to further weaken the franc, but have been met with no response.
The dollar rose 0.1 percent to finish at 79.63 yen. Part of this rise was attributed to importers in Tokyo as well as investors preparing for a long weekend of holidays in the United States. Markets within the United States will be closed on Monday in honor of Memorial Day.
On Friday the United States surprisingly chose not to call China a currency manipulator. Instead, the United States government has committed itself to fighting for policy changes with China. The United States government still believes that China is undervaluing its currency and is stopping it from appreciating against the dollar. Formerly, the United States had accused China of manipulating their currency to improve the country’s export market. The current decline in China’s trade surplus indicates that China does not meet the standards to be considered a currency manipulator. Even if the United States plans on pressing China for further currency changes, the possible results are hazy. China owns more than $1 trillion in United States government debt. Fighting against China’s devalued currency may only create new problems for the United States.