U.S. Dollar Could Weaken Amid Euro Talks

Feb 20, 2012 3:02pm

As euro-zone finance ministers continue to deliberate about a second big bailout for Greece, many investors seem optimistic about the progress of the talks.

But any measures to save  Greece from the verge of default could lift financial markets but weaken the U.S. dollar, possibly affecting American travelers heading overseas.

Nick Bennenbroek, head of currency strategy at  Wells Fargo, said the outlook for the U.S. dollar is mixed. Getting closer to a deal would lead to a boost in emerging currencies and some of the major currencies, such as the Canadian dollar.

On Monday morning, the euro rose to a one-week high and by midafternoon it was $1.32 to the  U.S. dollar.

Euro-zone finance ministers are still deliberating in Brussels over whether to agree  to a second, €130 billion, or $171.5 billion, bailout plan for Greece. Martin Koehring, economist for the Economist Intelligence Unit, said talks are unlikely to conclude before the early hours of Tuesday. Without the bailout, Greece faces the prospect of defaulting on a €14.5 billion, or $19.1 billion, bond redemption due by March 20.

“The fact that we’ve got zero to negative growth in Europe and the European Central Bank  will be potentially easing its monetary policy stance further” — by lowering interest rates or adding funds to their banking system — “does mean the euro will probably fall in the coming weeks or months against the dollar,” Bennenbroek said.

Also, U.S. economic numbers in the past few months, such as the falling unemployment rate, have boosted the U.S. dollar against the euro.

Travelers could also see marginal changes in exchange rates.

“I wouldn’t completely dismiss the relevance for those considering international travel,” Bennenbroek said, considering an estimated 5 cent increase in the Canadian dollar relative to the U.S. dollar in the next several months.

He said if  U.S. stock markets continue to strengthen, the dollar would  probably fall against the other currencies, such as the Mexican peso.

John Bowler, economist at  the Economist Intelligence Unit,  said he expects the U.S. dollar to weaken further.

He said the dollar had weakened against the euro since the start of the year as investors have regained their taste  for risk, triggered by the injection of €500 billion by the European Central Bank into euro zone banks in late December.

“As long as risk appetite remains strong, the dollar is likely to weaken further,” Bowler said. But  ”any shock, such as a disorderly default by Greece, would interrupt this trend and send investors back into the safe haven of the dollar.”

Koehring said allowing Greece to default would cause major losses among European banks and could raise fears among investors that Portugal  or Cyprus  — or  both — could be next, potentially raising the need for further bailouts of other highly indebted countries.

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