Trouble Brewing in Europe Could Send EUR/USD to 2 Yr Low

The big story in the currency market today is the Euro which hit a 2 month low against the US dollar. Ratings agency Moody’s warned that the exposure of Western European banks to Eastern European loans could affect their credit ratings. Up until the global credit crisis, Eastern European nations were growing at very rapid rates. This enticed many Western European banks to lend as much as $1.7 trillion to those nations. According to Morgan Stanley’s Stephen Jen, $400bn of that debt is expected to be rolled over this year – about a third of the region’s GDP.

On top of that, many companies in Eastern Europe were sold foreign exchange contracts to protect them against appreciation in their currency. Poland’s Polsi Koncern Meisny Duda SA (a meatpacker) reported that their currency derivatives contracts have floating losses of 29.3 million Zloty ($7.8 million). They wanted to hedge against a higher currency but instead, the zloty plunged 33 percent. Similar problems are expected for other Eastern European corporations. This could be a domino effect that hits the region as a whole.

Within the Eurozone, there is still fear that Ireland could default on their debt as credit default swaps hit record highs. A default in Ireland will add tremendous pressure on the Euro.

All of these problems brewing in Europe will mean more losses for European banks. This could force the European Central Bank to take more aggressive action on a monetary basis and drive the EUR/USD down to its 2 year low of 1.2330.

TIC Data Improves, Empire State Manufacturing Survey Hits Record Low

Why EUR/GBP Could Hit Parity



  1. It is not only the case of Polski Koncern Miesny Duda (correct spelling). Polish companies used to not only hedge, but, realising how profitable it could be, gain on appreciation of the zloty by buying put options while selling call options on EUR/PLN. The losses of Polish companies now amount to over 50 billion zloty. W. Pawlak, Poland’s Minister of Economy is talking about ‘minimizing negative consequences of currency contracts unfavourable for customers’ preferably by ‘legally revoking them’. Is he going to rob the banks? Zbigniew Jakubas, President of the Polish Business Roundtable, is a leading supporter of this political move. Unsurprisingly, he suffered severe losses through many SE listed companies while the zloty weakened.


Leave a Comment.