Wall Street Journal
December 15, 2011
The euro is finally catching up with the crisis. Having puzzled many with its buoyancy, the euro fell below $1.30 Wednesday for the first time since January and has dropped 3% in just a week as the reality of the failure of the December euro-zone summit has sunk in. A worsening growth outlook, the prospect of further European Central Bank rate cuts and lingering doubts about the euro's role in foreign central bank reserves mean it could be a bumpy ride from here.
The euro may now have become the main indicator of the depth of the currency bloc's crisis, potentially making it more volatile. Tuesday's sharp selloff, when the euro plummeted over a cent in little more than half an hour, was in contrast to relative calm in euro-zone peripheral bond markets, where bill and bond auctions have seen decent appetite, albeit at high yields.
Various explanations have been suggested for the move: Germany's refusal to raise the size of Europe's permanent bailout fund beyond €500 billion ($651.85 billion), continued speculation about ratings downgrades and reports that Greece's debt restructuring was facing problems. For the bond market, none of these stories are particular surprises. But for a currency market where the euro has widely been regarded as too strong and bets against the currency have been building, they reinforced post-summit blues.
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