Pro-Bailout Greek Party Wins Elections Yet Euro Still Likely to Fall Against US Dollar

Published: 18 June, 2012 17:25

Greek parliamentary electionsGreece’s recent general elections had much of the world holding their breaths as the fear that an anti-Eurozone party would come out victorious. The doomsday scenario many feared was that Greece would revert to the drachma and cancel its bailouts, leading to massive losses for the Eurozone as well as the potential for an even greater disaster, with Spain and Italy teetering on the edge. Fearing excessive volatility on the markets some online Forex trading brokers even shut down private trading on Sunday, the 17th of June.

While the “end of the Eurozone” scenario did not come to pass as the pro-Eurozone bailout New Democracy party came out victorious, this in no way signifies that the future is bright. A disaster may have temporarily been averted but there are still problems. First and foremost, the New Democracy party may have won the elections but they do not have enough seats in parliament to govern on their own, which will require a coalition. If they are unable to form a coalition, Greece will likely come to a standstill as the country’s government won’t be able to pass any reforms or laws to move it in one direction or the other.

Unfortunately, this standstill will hurt Greece even worse than doing nothing as the economy is still nowhere near recovery, with talks of another bailout in the works. The budget cuts imposed on Greece have led to massive layoffs and the country’s inability to clean their financial house has cause negative investor sentiment, leading to a reduction of capital on the Greek market. This, of course, maintains Greece in recession, which is predicted to spill over into the rest of the Eurozone. The latter is teetering on the precipice of recession, which will have a significant impact on the value of the Euro and Forex trading in general.

Eurozone Recession and the US Dollar

Considering that Europe is one of the U.S.’s largest trading partners, it shouldn’t come as a surprise that the U.S. economy is also likely to feel the backlash of the sovereign debt crisis in the Eurozone. With everyone waiting for the Federal Reserve monetary policy announcement and the critical situation in Europe as well as slowing growth in Asia, it seems likely that the US Dollar will rise significantly, especially since it is quite likely that QE3 will not become a reality.

Ben Bernanke has clearly stated that the small boost in economic activity that would result from a third quantitative easing program would not be worth the resulting inflation. While speculation abounds regarding what the Fed will do, it is likely that, at least in the short term, the US Dollar will rise as confidence in the Euro declines. Online Forex traders are also likely to short the Euro in favour of the US Dollar due to negative trader sentiment, which will only serve to drive the US Dollar higher.

Sadly, this could negatively affect the U.S. economy, especially if growth is significant, as exports become more expensive and trading volume shrinks. Despite this, it is likely that there will be an increase in long transactions on the US Dollar, especially against the Euro and the Yen as online Forex traders lose faith in the Eurozone.

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