The common currency of the European Union dropped sharply on the foreign exchange
market Monday morning, under pressure from investors and traders worried about sovereign debt.
The euro lost ground to the Swiss franc, the U.S. dollar and the Japanese yen, helping to trigger a fall in global equities markets.
The chief catalyst came from Standard & Poor's downgrade
of the the Italian government's credit rating outlook. The rating agency dropped neither the Mediterranean country's primary sovereign rating of A+ nor its short-term, top-level risk rating of A-1+.
"Italy has the largest government bond market in the eurozone and continued rising yields there over the coming weeks would have a very destabilising impact on the eurozone debt markets," Derek Halpenny, an analyst at Bank of Tokyo-Mitsubishi UFJ, wrote in a note to clients. "With the authorities still seemingly divided over how to proceed with the debt crisis there remains considerable short-term risks for the euro."
Other negative factors included surprisingly weak purchasing managers' surveys in both manufacturing and services, and renewed questions about a potential restructuring of Greek bond obligations.
The cost of insuring Greece's debt hit a record high, Bloomberg News
reported, as the yield on 10-year government bonds surged 49 basis points to an all-time record of 17 percent.
If Greece does restructure its debt payment or scheduling, it would send shivers throughout international markets. In many ways, it is the weakest of the struggling EU economies, but its fall would trigger further anxiety about Ireland, Portugal, Italy and Spain.
Further stress came as Spain's right-wing Popular Party thoroughly trounced the ruling Socialists, leveraging voter rage at the Iberian nation's struggling economy and rampant unemployment of more than 21 percent. With a 66 percent turnout, the Socialists lost every regional and municipal election.
"There is a 2.2-million difference in the number of votes between the two top parties," Ferran Requejo, a political science professor in Pompeu Fabra University of Barcelona, told the Christian Science Monitor
. "That wasn't expected. That distance is significant, and this could mean the Popular Party could win an absolute majority in the next general elections."
The Socialist government, under prime minister Jose Luis Rodriguez Zapatero, has pushed through harsh and unpopular austerity measures to fill the budget hole caused by a massive speculative bubble in real estate.
Spain's situation is similar to the United States' or Britain's, without the added cushion of a free-floating currency. Membership in the common currency union helped bolster the purchasing power of Spaniards and other citizens of the E.U.'s poorer nations during good years, but it's now preventing them from dropping their own currency to compensate for economic shocks.
The troubles in Spain also reverberated in Germany, where the Christian Democratic party of chancellor Angela Merkel finished a dismal third in the state of Bremen's election.
"We are at the end of the road for risk," John Taylor, the chairman of FX Concepts LLC, the largest currency-based hedge fund in the world, told Bloomberg
earlier this month in a telephone interview. "This is the end of the nice slow moving risk rally that has lulled us pleasantly to sleep since the first half of 2009."
Overall, the dollar may gain from these latest developments, though it has its own troubles. Efforts to raise the U.S. government debt ceiling remain stalled
on Capitol Hill, as recalcitrant Republicans demand cuts to social programs and try to use their leverage to force socially conservative legislation on embattled Democrats.
Organizations like the Corporation for Public Broadcasting and Planned Parenthood have become bargaining chips in a political struggle that bridges social and economic debates, and it's now clear which party will fold first.
The atmosphere remains volatile. Companies and organizations which do business across international boundaries and forex markets should strongly consider foreign exchange risk management
solutions to hedge their currency risk exposure