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Euro Drops Despite Bailout Package

By Marc Chandler BBH FX Strategy

After trading sideways in the London-less European session, North Americans have picked up where Asia had left off and have bought up the greenback.

The euro has been pushed below $1.3200 and is approaching the $1.3115 low seen last week. Many have their sights set on $1.30.

The dollar has traded on both sides of last Friday's trading range against the euro, Swiss franc and the yen. Sterling, ironically, despite the glimmers of hope in some quarters that the Tories might just pull off an outright victory, was unable to rise above last Friday's high, but did take out its lows.Support is seen near $1.5200 and then $1.5160.

While the personal income and consumption data from March contained no surprises and was largely contained in first quarter GDP figures before the weekend, the manufacturing ISM was stronger than expected, making a new cyclical high. Price paid rose instead of fell.

German officials have indicated that the purpose of the Greek aid was to stabilize the euro, but this claim seems misleading. In fact, the Greek yields are lower today and the peripheral bond markets are firmer.

The euro, on the other hand, has returned to levels seen prior to the rumors of a larger package that first circulated in the middle of last week.

With aggregate domestic demand in Europe to be undermined by efforts to cut spending and boost taxes--not just in Greece and not just in the periphery-- a weaker euro is thought to be needed in Europe to help bolster foreign demand.

Even under the best of circumstances, Greece and other peripheral countries would have a difficult time achieving the ambitious targets.

What makes many observers and investors skeptical is that Greece (and others) are still looking at a deepening contraction and the risk of deflation. Without nominal GDP expanding, the pain is likely to prove politically unacceptable. Remember what is at stake is not just this year but more savings will found next year and the year after.

Greece has updated its economic forecast to show a 4% contraction and 2.6% next year. The official forecasts have growth returning in 2012 and accelerating in 2013. The risk is that the contraction is deeper and longer lasting.

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