Troubles continue to dog Greece

More volatility and weakness are in
store for the euro this week as European Union leaders debate whether to offer
a lifeline to debt-strapped Greece.

Currency markets aren’t expecting
the EU summit this Thursday and Friday to yield a specific plan to support
Greece, but contradictory statements in the run-up to the event will whip
around the currency. Even if an agreement is reached, the euro may not necessarily
benefit for long, as problems of deflation and weak growth will continue to
hold it down.

“Extreme uncertainty”
surrounds this week’s meeting, said Sebastien Galy, currency strategist at BNP
Paribas in New York. “Nothing’s going to be resolved that fast,” he
said, which means the euro is likely to fall further against the dollar and the
yen. Since the start of the year, the common currency has lost 5.8 per cent against
the greenback.

Ahead of the summit, the Greek
government has ratcheted up the pressure, warning that it can’t continue to pay
the high interest rates the market is demanding and threatening to turn to the
International Monetary Fund instead. The euro zone’s position on involving the
IMF is in flux: France and the European Central Bank want the solution to be
found within the euro zone; Germany, which fears having to pay the lion’s share
of a bailout that would be hard to sell to voters, appears to be more inclined
toward drawing in the IMF.

“EU authorities seem to have
explicitly broken ranks on the issue of support to Greece,” said analysts
at UniCredit in Milan.

The outlook for continued euro
weakness will pose a problem for the Swiss National Bank, which has been
intervening in currency markets to keep the Swiss franc’s strength in check to
help the domestic recovery. The euro zone is Switzerland’s largest trading
partner.

But the SNB has been
fighting a losing battle: The outlook for growth in Switzerland has outstripped
the euro zone’s, fuelling expectations that official Swiss rates will rise
earlier than rates in the euro zone. With the worries over Greece’s debt
intensifying, rattled investors also have sought safety in the franc.

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