Euro resumes its decline taking some steam out of markets at the open

05/13/2010 10:35 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

  The euro is like a patient who has stabilized, but who goes back into decline whenever the doctors try to remove life support.

 The euro did strengthen immediately after Euro Zone politicians announced their $1 trillion rescue plan and central banks in the 16 euro economies stepped into the market to support the currency.

 But it turns out the rally in the euro had less to do with confidence that the rescue plan would end the debt crisis than with central bank buying.

As central banks have stopped buying euros—perhaps figuring their job was done—the currency has resumed its decline.

 As of 10:15 a.m. ET the euro had fallen to $1.2551 against the dollar. That’s near to the $1.2510 14-month low set by the currency last week.

 With traders seeing central banks step back from the market, worries that budget cuts (of the size needed to bring national accounts in Greece, Spain, France, Italy, and Germany back into line with the European monetary union’s 3% limit on budget deficit) will crush already tepid economic growth. The Euro Zone wide deficit for all its members is above 6% so traders know that the spending reductions can’t be cosmetic. Euro Zone GDP growth already lags that in the United States with first quarter year-to-year GDP growth coming in at 0.5% versus 3.2% in the United States.

Out of the gate this morning worries about the euro and European economies stall the continuation of yesterday’s rally in U.S. stocks. Whenever worries rise, the first impulse is to take profits.

 Watch to see how worries about the euro balance out with good earnings and economic news from the U.S. economy.

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