Why is the Euro Still Selling Off?

The euro has been sold to new lows in the aftermath of the ECB meeting and Trichet's press conference. Trichet did not say or do anything to stop the rot.

There was no attempt to address the liquidity squeeze that is apparent not only in the euribor market but also in short end of the dollar LIBOR curve. To the extent Trichet addressed the euro itself, he showed no real concern. Indeed his silence in the face of the euro's near free fall this week (-5% against the dollar) was deafening. German Economics Minister Bruederle was quite explicit: he is not worried about the euro's depreciation. The headline appeared to coincide with the break of $1.27.

In the past, Trichet has used strong words to protest the price action in the foreign exchange market. Boiler plate comments about the euro being a good store of value is hardly sufficient in the current environment. Despite Trichet's defense of the ECB's decision to accept Greek bonds as collateral regardless of their credit worthiness, it failed to erase the sense that the central bank succumbed to political pressure.

In sword fighting, it is said if you feel mush, push. Feel steel retreat. The market feels mush. The pain threshold of European policy makers has not been reached. Trichet's comments has not only encouraged euro sales, but the pressure on the beleaguered Meds' bonds continued apace.

It is getting increasingly difficult to see how the rot stops. At various points during the crisis, there have been opportunities for officials to get ahead of the the curve of market expectations. They failed to do so each and every time.

Look at what Italy said today. It debt to GDP forecast was raised to 118.4% this year from 115.8% last year and Finance Minister Tremonti blamed this on the pledge to support Greece. Tomorrow its parliament is expected to take up the Greek assistance funding. Even if Tremonti is being a bit disingenuous, the fact is that assistance to Greece from other weak credit countries can prove to be very counterproductive.

At the end of last week, the idea was that the EU/IMF package could buy Greece three years to get its house in order before having to go back to the capital markets. Almost immediately observers questioned whether the amount was sufficient. Today the IMF let it slip that Greece won't have to go to the capital markets for 18 months--half the time the market initially expected.

In fairness, the euro is not alone. Sterling has broke the $1.50 level and quickly dropped more than another cent. Election jitters are blamed and a UK clearer was supposedly a featured seller.

Earlier today the SNB had stepped away from its effect to prevent CHF appreciation and the euro immediately plunged to record lows against the franc. There is some talk that after the euro fell from above CHF1.43 to below CHF1.4050 that the SNB, or an agent, may have shown their hand again and this may have helped steady the euro-franc cross at sharply lower levels.

The yen is a major beneficiary of the unwinding of positions and risk-reduction. This will not set well for Japanese exporter shares or the Japanese government, which continues to wrestle with deflationary pressures. Earlier today a second government panel called for a weaker yen. There is not much dollar support ahead of the JPY91.50-JPY92.00 area.