Euro Falls on Slowdown in Europe’s Service Sector Activity |
The euro's momentum against the U.S. dollar was halted on Tuesday, as signs of a slowdown in Europe's service sector activity started to appear. At the moment, the euro fell down below the $1.45 barrier, trading at $1.4496.The euro is still too strong for the Japanese yen, however, rising 0.08% to ¥117.58.
The euro suffered losses as analysts' focus shifted from Greece to hard data, which suggested the Eurozone economy is slowing down. The euro was hit by a sharp slowdown in France's service sector activity. In June, France's services PMI fell to 56.1, from 62.5 in May, which represents the steepest fall in the 13 year history of the index. The index still remains above the 50 points mark, however, which indicates expansion.
France is the Eurozone's second largest economy and the majority of its GDP falls on its service sector. As a result, a sharp slowdown in France's service sector will have markets worried as more pressure builds up on the European Central Bank to postpone interest rates hikes.
At the same time, the German service sector started to cool as well. In July, Germany's service sector activity fell to 56.7, from 58.3. The services PMI for the whole Eurozone also declined in June to 53.7, from 54.2 in May.
Germany has recently been the locomotive driving the Eurozone recovery. The latest results are another sign that Europe's largest economy is losing steam. Many analysts thought an interest rate hike in July is inevitable. It remains to be seen if the widespread slowdown in the Eurozone's service sector activity, which account for the bulk of GDP, can persuade the ECB to leave its interest rates on hold in order to help the Eurozone's faltering recovery.
The euro is still a hostage of Greece, however. The problem-ridden Eurozone member has maybe avoided defaulting last week, but its problems are far from resolved. Above all, the rating agencies have warned that if the private sector gives a postponement to Greece for repaying its debt, they will view it as a technical default. The first agency to repeat such a warning following the crucial parliamentary vote last week is S&P.
German and French banks, which are most exposed to the Greek debt, have already agreed in principle to roll over a part of their loans to Greece. The plan, which was put forward by the French President Nicolas Sarkozy, is aimed at giving more time to the Greeks to bring back the order into their finances and economy and then pay back their debt.
The Europeans should be worried by a recent warning from Moody's on bad Chinese debt, however. According to Moody's, bad loans to China's local governments is a far bigger problem than first estimated. In 2010, China's banks have lent an estimated $1.3 trillion to local government, in an attempt to boost growth. The rating agency claims the debt could be much larger, however.
The Chinese have played a significant role in helping the Europeans cope with their debt crisis by buying government bonds. Recent evidence of a looming debt crisis in China might persuade the Chinese to start looking more inwards, depriving the Eurozone of one of its main allies.
Some traders will think Greece will fail in its implementation of recently agreed reforms, which will ultimately force it to declare bankruptcy. The Greek default will send shock waves through the rest of Eurozone, ultimately sending the value of the euro crashing. Recent evidence from China might add more salt to Europe's wounds, since a very important ally might be forced to start dealing with its own debt problems.
About the author: Benzinga
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