Business as usual: Euro falls, dollar climbs, stocks tumble

05/20/2011 6:20 pm EST


Jim Jubak

Founder and Editor,

Today the euro is down and the dollar up. That means commodities stocks are down.

Yep, the relationship between the euro and the dollar remains the big driver in global financial markets.

Today, May 20, the euro fell against the dollar for the first time in five days. That has put an end to the rally in U.S. stocks that took the Standard & Poor’s 500 from 1328.98 on May 17 to 1343.6 yesterday, May 19. Today the S&P 500 finished down 0.8%.

Today’s big, bad news for the euro comes out of the European Central Bank, the week’s currency Grinch. After throwing a tantrum yesterday over talk of restructuring Greek debt—No, Nein, Non!—another member of the bank’s governing council weighed in with remarks that the bank could stop accepting Greek government debt as collateral for loans to Greek banks in the case of a reprofiling of Greek debt. (In a reprofiling Greece would keep paying interest on its debt but bondholders would agree to stretch out the maturity of that debt. That way Greece would be under less pressure to refinance maturing debt at the punished rates—about 25% for Greek two-year notes--in the financial markets.)

If the European Central Bank stopped accepting Greek government bonds as collateral for loans to Greek banks, those banks would stop buying Greek government debt. And that would produce exactly the kind of financial crisis that the bank says it wants to avoid.

Why the seeming contradiction? Because the bank is locked in a battle with Eurozone politicians over the next steps in addressing the continuing Greek debt crisis. Remarks like this are best seen as bargaining chips.

But bargaining chips or serious policy decisions, remarks like this are capable of depressing the euro.  The euro finished the day at $1.4161, down about 1.04%. (It didn’t help either that Fitch Ratings cut its rating on Greek long-term debt to B+. That’s four notches below investment grade.)

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