Euro struggling with its own Greek tragedy (part II)

May 23, 2010 10:49 am

Because of the diminishing trust of investors in the European currency, the euro fell from $1.40 at the beginning of February to $1.2144, the lowest level since April 2006. The free fall of the euro/US dollar also dragged industrial commodities down. Gold and Silver on the other hand, could profit from the flight to safety.

In my previous article, I stated that it could be doubted whether the European currency would recover from its ‘Greek tragedy’ soon. The hopelessly divided European Union found itself in a ‘Catch 22′ situation. A bailout of Greece would send the wrong signal to other weak EU countries with a loose budget policy. On the other hand, an exit from Greece could erode the value of the Euro even further. A break up of the European Union could conceivably be seen in this kind of situation.

So far, Greece has been helped by the EU and the International Monetary Fund with a EUR110bn bailout package. Moreover, Europe has also initiated a massive $1 trillion regional bailout plan to calm the markets and to prevent a domino-effect collapse. Recently, Germany banned speculative short trades. During the trading days after, this measure only increased concerns that even Europe’s largest economy may not be able to contain the crisis. In other words: Despite the massive rescue plans, investors became even more scared.

Despite the severe problems Europe is facing, according to Goldman Sachs this European problem should not be exaggerated. In Goldman Sachs’ opinion, the risk of a significant decrease of economic growth in the Eurozone is limited. Thanks to the low interest rates in most of the important global economic regions, together with government economic stimulus packages, the American investment bank remains optimistic. Goldman Sachs predicts an economic growth of 4.9% this year and +4.8% in 2011.

If the European damage is limited and will not have a significant impact on global economic growth, maybe the recent 20% drop in oil prices provides a nice buying opportunity. The price of West Texas Intermediate (Light Sweet Crude oil) is approximately $70 per barrel versus a high of $87 a few weeks ago.

However, if history repeats itself like 2008 then it would be different and dangerous story. During this year, as is well known, stock markets crashed together with a collapsing Euro, dragging commodities down with them. Key levels for the euro/dollar to watch carefully are $1.22 and $1.25. A significant break of this support zone, might warn us again for more turmoil ahead. As long as the euro manages to stay above this support zone, an upward swing can be expected.