The debt crisis in Greece, Italy, Spain, Portugal, Ireland, France, Belgium ... oh wait, let me just save words and start over. The debt crisis in everything not named Germany is threatening the viability of the euro currency itself. The euro has plunged more than 4% against the dollar in just the past three weeks. And while a 4% drop may not sound like that much, it really is in the more staid world of currencies. Despite a slight bounce on Thursday morning, most currency experts think the euro probably has a lot more room to fall. The euro is trading around $1.35. Dean Popplewell, chief currency strategist at OANDA in Toronto, said that unless someone -- be it the European Central Bank or the International Monetary Fund -- steps up with a viable plan to backstop the debt of Italy and Spain. And maybe even France.
"There's a tennis match between the ECB and IMF. The lack of a major ECB presence in the bond market has shaken confidence," Popplewell said. "At the moment, the market would like a relief bounce for the euro, but it's vulnerable to more weakness." So how low could the euro go? Kathy Lien, director of global research and analysis at currency broker GFT in Jersey City, N.J., said the euro will likely head back toward recent lows from early October of about $1.315. Lien said a Greek default is now largely expected but that news will have to get much worse for the euro to plunge further. "There is a good possibility the euro could retest the lows, but $1.30 is a psychologically significant level. It won't go there unless Italy actually defaults and Spain follows," she said. Presumably, the ECB and IMF won't let it get to that point. On the other hand, since the euro crisis began in earnest in early 2010, the one thing investors can reliably count on is that European leaders will delay key decisions until the last possible moment. (Just like American politicians ... but that's a story for another day.)
Why Germany needs the euro
That's why there could be more pain ahead for the euro. "What would be helpful would be if Europe clarifies the bailout process," said Axel Merk, president of Merk Mutual Funds, a Palo Alto, Calif.-based money manager specializing in currency investments. "Greece has to default at some point but bad news is better than no news. If you don't know where things are heading, that's a problem." Merk said what makes things more difficult is the fact that the solution many people are clamoring for to "save" Europe -- a bold ECB debt-buying plan similar to various Federal Reserve efforts -- might only make the euro even weaker.