Mario Draghi to Decide If Eurozone Economy Is Ready for Euro Cut

NEW YORK (TheStreet) -- Hard economic times are pinching the Eurozone and the once powerhouse Germany is starting to recoil along with France and Italy from the tightening squeeze and fear of deflation.

There's little doubt European Central Bank President Mario Draghi would like the euro to value to decline further as that would make Eurozone products more desirable on the world market. 

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Draghi has seen to lowered ECB policy rates, one even into negative territory, but has been reluctant to move into the policy area of quantitative easing. The closest move in that direction was last week's proposal that the ECB purchase asset-backed securities, with the option of buying sovereign debt not discarded altogether. The full program will be discussed at the October ECB meeting.

Previously Draghi hadn't shown much interest in any form of quantitative easing so this was seen as a positive move to an easier monetary stance by investors. The proposal surfacing had a favorable impact on the market. 

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The market dropped below $1.3000.

I am still not convinced that Draghi wants any form of quantitative easing, yet he wants the value of the euro to decline further so as to spur on Eurozone exports. U.S. results of quantitative easing hasn't convinced Draghi the same initiative could spur the Eurozone economies.

Draghi's objective seems to be a further decline in the value of the euro. The question is whether or not the euro can decline further? Looking at recent history it is clear that the euro can decline further...and fairly rapidly.

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On Dec. 1, 2009, the value of the euro closed at a near-term high of $1.5100. On June 7, 2010, the euro closed at a near-term low of $1.1959.

The euro rebounded and reached another near-term peak of $1.4875 on May 3, 2011. But, on July 24, 2012 the euro was down to $1.2062.

It seems as if there is a resistance area for the euro around $1.20 and this has been achieved twice within the past five years. A decline to a value of $1.20 is not out of the question. 

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My guess is that he would like to achieve something close to a $1.20 value without having to resort to some form of asset purchases. He will likely use the possibility of an asset purchase program if the market does not respond on its own.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


 

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