Euro at 2-Year Low on Europe’s Credit Crunch

The European currency fell to the lowest level in the last two years against the Japanese yen and the weakest level in more than 13 months against the U.S. dollar today as the credit crisis urged Eurozone’s governments to pledge a help to the troubled financial institutions.
The euro declined against the U.S. dollar for the sixth day in a row today after opening with a considerable downside gap over the weekend. German government in a joined effort with some country’s financial institutions pledged to bail-out national biggest property lender Hypo Real Estate Holding AG, while Belgium prepared a new deal for salvaging Fortis, nation’s biggest corporate bank.
The carry trade «death» buried not only the Australian and New Zealand dollars, but also spurred the sale of the euro against the Japanese yen. Forex carry trade was based on lending the low-interest yen to buy high-yielding currencies such as NZD, AUD and EUR. With a current high level of risk-aversion such trading technique is widely considered to be dead.
The analysts are worried with the situation in the Eurzone as it’s not certain whether more banks will require bailing out and if the governments will provide enough liquidity to support the financial system. The whole bail-out process, in fact, increases the cash supply of euro, which weakens the currency’s rate. It’s very likely that the euro continues the current downside trend in a long-term scale.
EUR/USD dropped from 1.3637 to 1.3599 as of 8:32 GMT today after opening with an impressive gap from the Friday’s close level — 1.3770. EUR/JPY also opened with a downside gap today — 145.11 on Friday’s close and 143.05 on today’s open; it declined to 140.64 today. EUR/GBP is trading almost unchanged today near 0.7733 level after showing some moderate volatility during the Asian Forex trading session.

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