Euro Rallies Fuelled by Hopes of More European Banking Integration

After a tough time last week, the euro has rallied against the dollar and the yen. Investor confidence has increased slightly in the European Union’s ability to contain debt issues and fix bailout problems. On Monday, the European Commission showed its support for an aggressive plan to fix the Eurozone’s debt issues. After Spanish banking problems and the possibility of Greece exiting the euro, the news has come as a relief to investors around the world.

Investors are still awaiting the results of a phone call between the G7 finance ministers and central bank governors. They plan on discussing the European debt crisis and ways to resolve continued instability in the European Union. The biggest issue facing the European Union is finding an approach to the debt crisis that everyone can agree on. More stable nations like Germany and France are hesitant to bailout countries that they believe will still be likely to undergo the same problems in the future. As the ministers seek to find common ground, a recovery of the euro may be short-lived.

Overall, the euro was trading 0.5 percent higher than it had on Friday. It hit $1.2509. Although this is still far from the ideal rate, it is an improvement over recent days of trading. The Monday peak trading marked a four-day high for the euro. In light of the holiday in the United Kingdom, the trade volume was much lighter than normal until other world markets opened up.

On Friday, the euro had hit an 11.5 year low against the yen and was trading at just 95.57. Today it rose 0.8 percent to trade at 97.75 yen. This improvement came as a relief to investors who were worried about the impact a further fall in the euro could have on global markets and recovery efforts. Part of the rise in the euro can be attributed to comments made by the European Central Bank policy maker, Ewald Nowotny. Earlier in the day, Nowotny had issued a statement stating his belief that there should be a European banking union. The idea of a banking union has been met with positive responses by world investors and seems to be a possible European solution to the banking crisis.

In Spain, Prime Minister Mariano Rajoy expressed his belief that there should be some sort of central authority overlooking banks within the European Union. Across Europe, other countries have expressed their support for a banking union to oversee fiscal policy. Germany has shown support for more euro integration, but is uncertain if it will be enough to solve current fiscal problems.

In response to the crisis, the European Central Bank is meeting on Wednesday to figure out if they should take action with monetary easing. The European Central Bank has some room to cut rates due to the factory prices holding stable. If the ECB chooses to cut rates, it could raise investor confidence in the euro. Further stimulus measures could help to jumpstart the euro and get European finances back on track.

After last week’s euro sell-off, Bernanke has finally chosen to speak about the crisis. On Thursday of this week, the Chairman of the Federal Reserve will be testifying before a congressional committee. Ben Bernanke is expected to speak about the United States economy’s outlook. Investors will be using his testimony as a guideline about potential policies and measures the Federal Reserve will be taking in the next few weeks.

On Friday, the United States Bureau of labor Statistics issued their labor numbers for the month of May. This amount was much lower than the 150,000 jobs expected. Throughout the month of May, the economy added less than 70,000 jobs. For the market to be stable, economists assumed that the United States economy would need to add at least 100,000 jobs to remain afloat. In response, many investors believe that Bernanke will announce plans of quantitative easing measures during his testimony on Thursday. 

Against the yen, the dollar rose 0.3 percent to finish at 78.25 yen.  On Friday, the dollar was at just 77.65 yen which was the lowest rate since the middle of February. In recent days the rate for the yen has fluctuated greatly. Rumors that Japan may intervene to depreciate the yen fueled speculation in the marketplace and made the yen increasingly volatile.

The Bank of England is also expected to perform quantitative easing in the coming weeks. In response, the pound rose 0.1 percent against the dollar to end at $1.5380. Investors may be holding off in hopes of timing quantitative easing measures to turn a profit.