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Feldstein and Goldman Sachs: Making A Case for the Euro

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By Dian L. Chu, Economic Forecasts & Opinions

Former European Commission President Romano Prodi this week said the worst of Greece's financial crisis is over and other European nations won't follow in its path.

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The Sunday Telegraph also reported the European Union (EU) nations were preparing a "bailout package" for Greece that could exceed $34.4 billion as early as Monday the 15th, with Germany and France the main cash backers.

So far, Greece has not sought help from its EU partners. However, an April and May deadline to repay debt back has pushed Greece to seek financing of around 20 billion euro on the bond market.

Greece has promised to cut its deficit from 12.7% to 8.7% this year while its long-term plan is to reduce the shortfall to below 3% by 2012.

Traders Betting Big on Euro's Decline

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Meanwhile, futures traders placed the biggest bets on record that the euro will decline against the dollar even as European officials mulled guaranteed debt sales to help Greece, according to Commodity Futures Trading Commission (CFTC) data as of March 9. It was the fifth week in six that the amount climbed to a record.

EUR/USD Pair Dance

The sheer liquidity of the euro and dollar pair has an overwhelming influence on the single currency for the past year or so. The dollar was heading towards a debasing path on concern of the mounting national debt and budget deficit. The euro, by virtue of being the market's favored alternative currency, typically moves with the dollar, but in the opposite direction.

However, the Greece sovereign debt crisis has switched the euro to the driver's seat this year as investors fled the euro seeking safety in dollar-based assets.

Although Europe's common currency fell against all of its 16 most active counterparts this year, the euro touched a one-month high versus the greenback as stocks gained as concern eased Greece would default.

Implicit Guarantee

For years, the Greek government has demonstrated rather thriftless spending behavior. This was exacerbated when Greece started to pay lower interest rates on government bonds by virtue of having entered the European Economic and Monetary Union.

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Greece's interest rates were subsidized due to an implicit guarantee from the strong members of the euro zone, who were expected to support weaker members in times of trouble.

Buy Euro Now, Says Goldman

It is this implicit safety net that prompted euro optimism from Goldman Sachs (GS). As reported by Bloomberg, Goldman Sachs is advising investors to buy the euro against the dollar, betting it may rise to $1.45, as sentiment toward Greece improves.

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http://dianchu.blogspot.com
Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to several leading investment websites. Ms. Chu's work is also syndicated to media outlets worldwide. She blogs at Economic (more...)
 

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