Trouble Brewing in Europe Could Send EUR/USD to 2 Yr Low

The big story in the currency market today is the Euro which hit a 2 month low against the US dollar. Ratings agency Moody’s warned that the exposure of Western European banks to Eastern European loans could affect their credit ratings. Up until the global credit crisis, Eastern European nations were growing at very rapid rates. This enticed many Western European banks to lend as much as $1.7 trillion to those nations. According to Morgan Stanley’s Stephen Jen, $400bn of that debt is expected to be rolled over this year – about a third of the region’s GDP.

On top of that, many companies in Eastern Europe were sold foreign exchange contracts to protect them against appreciation in their currency. Poland’s Polsi Koncern Meisny Duda SA (a meatpacker) reported that their currency derivatives contracts have floating losses of 29.3 million Zloty ($7.8 million). They wanted to hedge against a higher currency but instead, the zloty plunged 33 percent. Similar problems are expected for other Eastern European corporations. This could be a domino effect that hits the region as a whole.

Within the Eurozone, there is still fear that Ireland could default on their debt as credit default swaps hit record highs. A default in Ireland will add tremendous pressure on the Euro.

All of these problems brewing in Europe will mean more losses for European banks. This could force the European Central Bank to take more aggressive action on a monetary basis and drive the EUR/USD down to its 2 year low of 1.2330.

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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