New Democracy Wins, Euro Rallies

euro poundAfter news of the Greek election was finalized, the foreign exchange markets opened to a higher euro. The euro hit its highest level for over a month today. On the other side of the world, the Australian dollar also hit a one month high against the United States dollar. The dollar continues to be held down by speculation that the Federal Reserve will do another round of quantitative easing.

Hello, New Democracy

The Greek New Democracy party managed to win elections in Greece by a narrow margin on Sunday. Previously, New Democracy had stated their commitment to upholding austerity measures and remaining within the European Union. Other parties within Greece had been against these principles. As a result, investors were worried about the possibility of a Greek exit or default. The election results came as a relief to investors around the world.

After election results were posted, the euro managed to gain against both the yen and the dollar. Although the Eurozone is safe for now, it will still have to focus on bailout issues in Spain and Italy if it wants to remain solvent. Both Spain and Italy have government and bank debt problems that will need to be resolved for the country to move forward. Investors are taking large short positions as they bet on the outcome of bailouts around the Eurozone.

So far, the euro managed to reach $1.2748. On June 1, it had hit a two-year low of $1.2288. The current rate is a drastic improvement from earlier this month, but still lower than its high in February. Its highest this year occurred five months ago with a high of $1.3486. Since that time, the euro regained a total of 38.2 percent of the amount it had lost to reach today’s exchange rate of $1.2748.  Some market analysts believe that the euro could reach higher than $1.29 this week before Friday’s EU finance minister meeting. The European Union will also be holding a summit later on this month.

Changing Focus

Since issues in Greece have been somewhat resolved, the focus is shifting to the Spanish and Italian both markets. Last week, Spanish ten-year bonds rose to their highest level since Spain joined the European Union. Market analysts think that the recent election in Greece should help to drive down the interest rates on government bonds.

United States Economy Still Weak

After weak consumer confidence reports and rising unemployment, the United States economy is still experiencing trouble. Market analysts believe that the Federal Reserve Bank may attempt to extend its bond buying past June for a few extra months. The recent disappointing data has caused investors to wait for this week’s Federal Reserve Bank meeting before they place any bets on the currency.  Part of the euro’s recovery this week can be attributed to speculation on Federal Reserve intervention.

In response to the weak United States market, the Australian dollar managed to hit its one month high of $1.0135. With the upcoming meeting by the Fed, the dollar should not fall too much farther until after investors hear the results of the meeting. The New Zealand dollar was also doing well and rose above $0.79.

Yen Falls

The yen fell 0.5 percent from Friday’s high against the dollar. It reached 79.19 yen. As investors become less risk adverse, they are returning to high-return investments and forgetting about the safe haven of the yen. If the rally of the euro continues, investors should plan on buying up more yen in the next couple of weeks. Analysts believe that the depreciated yen will actually reverse course within the month. Although elections in Greece have cooled investors’ concerns, problems within the Eurozone will only set it up for future issues. As investors see how Spanish bailouts play out, the value of the euro will fluctuate greatly in the coming month. This week’s round of G20 meetings will be just the first test of the euro’s rise in value.

Overall, Asian stock markets were up Monday morning as investor confidence rose in the wake of the Greek elections. The Dow Jones was up 40 points early on in the day and the Nikkei 225 index rose 1.9 percent. So far, it appears the week is off to a great start for forex investors around the world.