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European Summit Scheduled to Start Tomorrow

Wednesday marked the third day in a row that the euro fell against the dollar. On Thursday, the European Union will be holding a summit to discuss bailout options and ways to consolidate the European debt crisis. Chancellor Angela Merkel of Germany has already stated that Germany does not want to issue joint-bonds for the entire Eurozone.

European Summit

Investors around the world were hoping that the European Union would create closer ties for financial matters and debt. After the numerous statements made by Chancellor Angela Merkel in recent days, it appears like no surprising breakthroughs will made during the summit. The summit will run for a total of two days. Until it takes place, investors are waiting to sell off their euros just in case the EU makes significant progress during the summit.

In recent trading today, the euro fell 0.2 percent to hit $1.2468. This is still higher than the two-week low it hit last Tuesday of $1.2440.  Earlier this month, the euro managed to reach its lowest levels for over two-years. On June 1, the euro dropped to $1.2288. If things get worse for the Eurozone and the summit yields no results, investors could see the euro reach these record lows again.

Italian and Spanish Bonds Auctions

On Wednesday, Italian six-month bonds hit 2.956 percent. This marks the highest level for these bonds since December. On Thursday, Italy will be selling off 5.5 billion euros in five- and ten-year government bonds. If the Eurozone summit results in a banking union or activated rescue fund, investors may take the decision as a cue to start buying up Spanish and Italian debt.

Spain is facing even more issues with government and banking debts. During a debt auction on Tuesday, Spanish debts almost tripled. Three-month bonds rose to 2.36 percent while six-month bonds jumped to 3.24 percent. Previously, these bonds were respectively at 0.84 percent and 1.74 percent. Spain is hindered from addressing its debt problems due to a troubled banking sector and overspending within the nation’s autonomous regions.

If the euro rises to $1.27 or $1.28, it will cause more market fluctuations. Investors who are holding off from making a sale now will choose to do so once the euro hits $1.27 again. Until the summit is complete, no one knows for sure if the euro will rise or fall again. Considering the statements made by Germany, it looks like the results of the EU summit will be disappointing. Market analysts believe that if the summit disappoints, the euro could drop as low as $1.20.

Euro Rises Against the Yen

The euro rose 0.2 percent today against the yen to finish at 99.42. Comparably, the dollar also rose 0.3 percent against the yen. In the most recent currency trades, the dollar was trading at 79.74 yen. This level marks a drop from the two-month high of 80.59 yen that the dollar reached earlier in the week. Although the euro also rose against the yen, it still has not recovered from its two week low of 98.71 that it reached yesterday.

Japan is currently experiencing some political turmoil. The Prime Minister of japan, Yoshiko Noda, passed a tax increase plan despite objections from his party. Noda decided on carrying out the tax hike as a means of addressing the rising cost of Japanese public debt. Currently, Japanese sovereign debt exceeds two years of the Japanese gross domestic output. As disapproval rises, the chances of a snap election may occur in Japan.

Analysts do not believe that these developments will noticeably affect the Forex market. In the past, investors have placed speculative bets based off of the Japanese economy. The majority of these bets did not pay off. With the uncertainty surrounding the yen and the political situation, investors do not want to risk placing the wrong bet. Market analysts from Morgan Stanley did state that the new taxes could depreciate the yen over the next few years.

Oil Falls, Currency Stays High

Brent Crude has dropped 26 percent in the last three months while coal has fallen 18 percent. As commodities fall, the commodity currencies normally drop along with them. In this case, currencies have not fallen with commodity prices. In New Zealand, Norway, Australia and Canada, the currencies have only depreciated 3 to 4 percent over the last three months. 

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