Currency watch: euro on the brink amid Irish bailout

The Irish are taking a bailout from the EU/IMF in an attempt to support their banking sector, their economy, and through them, the rest of the EU.

Much like the days after the Greek bailout in May, the market is focusing on other peripheral EU countries and looking for cracks.

The brightest spotlight is falling on Portugal and Spain and their borrowing costs, an indicator of risk, are rising on a daily basis.

I think the euro would be able to withstand Portugal stumbling and requiring money from the EU. Spain, however, would likely be the straw that breaks the camel’s back.

I have been bearish about the euro for the most part of this year for precisely this reason; the Eurozone is an experiment of union governed by a unified monetary policy without a unified fiscal policy. It’s destined for disaster.

In the immediate aftermath of the bailout announcement we saw euro and other risky assets strengthen but the likelihood that we will have an Irish general election has swiftly eliminated any hopeful sentiment.
 
Sterling meanwhile has been happy to sit on the sidelines while the euro gets smashed. It has lost ground against the dollar, however, on the Irish and Korean issues, as investors sip at the fountain of safety as opposed to the well of risk.

Next week is also fairly quiet but the one thing that we may have learnt from 2010 is that quiet does not mean calm.

Jeremy Cook, chief economist at World First, 26.11.2010