Euro Gains for Test of 1.4010, But Downside Risks Remain

The euro rallied for a test of 1.4010 against the US dollar today, and while the currency ended the day up against most of the majors, there are longer-term downside risks to consider.

Today the International Monetary Fund (IMF) said that Ireland’s banks may face up to 35 billion euros in losses through 2010, as GDP there may shrink a cumulative 13.5 percent in the three years through 2010 and banks like the Bank of Ireland and Allied Irish Banks hold massive amounts of bad debts. This has prompted the Irish government to move toward a proposed “bad bank” called the National Asset Management Agency, which will buy as much as 90 billion euros in toxic property loans, according to Finance Minister Brian Lenihan. However, this is just one example of the sharp deterioration of Euro-zone member countries, and indicates that instability stemming from a “one size fits all” type of monetary policy enacted by the European Central Bank may only be starting to rear its head.

Meanwhile, the euro held on to its gains from yesterday against the Swiss franc following intervention by the Swiss National Bank. The SNB has said multiple times in the past that they would do so, as an appreciation of the Swiss franc against the euro threatens to increase deflation risks, since the Euro-zone is Switzerland’s biggest trading partner.

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