POLITICIANS ARE DRIVING EURO-DOLLAR

DIRECTOR OF CURRENCY RESEARCH, GFT

THE euro/dollar found itself on a decidedly more shaky ground at the start of this week’s trade after Germany’s Finance Minister stated that the EU’s largest and most important economy had no intention of adding more capital to the EFSF fund. Wolfgang Schauble told German media he does not support expansion of the EFSF, calling last week’s reports that the EU was considering such an option a “misunderstanding”.

The EU has already allocated 440bn euros to the EFSF, but markets continue to worry that even this may not be enough to save the euro if Spain runs into trouble. Schauble’s reluctance to provide more aid is clearly the result of strong domestic opposition. Angela Merkel’s government must walk a fine line between appeasing its constituents at home and complying with EU obligations. Yet by delaying the discussion until the next meeting in March, German officials may be creating a bigger problem for themselves.

Yesterday, the euro/dollar received a boost when Russian Deputy Minister Zhukov suggested that Russia may invest in Spanish debt, but the statement was as much political as economic and it is unclear how much capital the Russians will commit to this idea.

In the meantime, Eurozone credit markets will see a flood of issuance from both Northern European economies as well as Spain and Greece this week. If those disappoint, euro/dollarcould slide towards the 1.300 level again as sovereign debt concerns return with a vengeance. European officials would then have to scramble to appease the credit markets and the solution may prove more costly for all involved. While the dollar is backed by the full faith and credit of the US government, such a clear vote of confidence from the Eurozone appears to be missing, leaving the euro vulnerable.