Currency Traders: Europe's Bank Woes Will Weigh on Euro

Tuesday, 19 Jul 2011 11:50 AM

By Dan Weil

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The continuing troubles of European banks will push down the euro, as the continent’s debt crisis runs amok, currency traders tell The Wall Street Journal.

 

Many experts doubt the stringency of the recent European bank stress tests. The results, released last week, showed that only eight of 90 banks failed.

 

But many of the banks are burdened with large holdings of sovereign debt from troubled European nations, such as Greece, Portugal, Spain, and Italy.

 

And currency traders are skeptical about this Thursday’s European summit meeting to develop a second bailout package for Greece.

 

"Overall, the euro remains in a very vulnerable position," Ian Stannard, head of European currency strategy for Morgan Stanley, tells The Journal.

 

"Although European authorities are continuing to tackle the problems as they arise on a case-by-case basis, the fact that they are continuing to struggle to reach common ground on the longer-term strategy is going to keep the [euro] under pressure."

 

Given the severe problems faced by European banks and the chance of contagion for the continent’s debt crisis, Stannard sees the euro dropping at least to $1.36 by year-end. It traded at $1.41756 mid-day Tuesday.

 

Euro bears abound. “We’re back to this great amount of uncertainty about what’s going to happen with the second Greek bailout,” Vassili Serebriakov, a currency strategist at Wells Fargo, tells Bloomberg. “If European bond yields continue to rise, the euro will be heading lower.”

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