"Debt crisis" and "bankruptcy" have become commonplace terms in most of Europe. And it's not just local businesses that are underwater and can't make interest payments either; it's countries.
Unbelievably, entire countries in Europe are either in, on the verge, or should have already declared, bankruptcy. And those countries are still in trouble despite trillions of euros in relief.
Greece and Ireland have already received multiple handouts from the EU. Portugal and Italy are likely to demand more assistance in the months ahead too. With all the bailout loans going around, many people wonder if these countries will ever pay back their debt.
The uncertainty in the debt market has resulted in higher yields on European bonds. Of course, higher yields on bonds make it more expensive to obtain new money. And higher costs present a huge problem to government budgets; some European countries can barely keep the lights on.
How can those countries be expected to repay debt at a higher interest rate?
Investors have asked themselves the same question. And recently, investors have been unwilling to issue new debt and receive only a small amount of interest in return. Bond holders take risk very seriously, and want to be compensated for additional financial hazard appropriately (higher yields). And unless the ECB steps in and supports the bond market, yields will continue to rise.
One way that the ECB could remedy the situation is by "pulling a Bernanke" and flooding the eurozone with euros. If the ECB were to interfere in forex and inflate the euro, the interest payments on existing debt would be easier to make. Additionally, a devalued currency can boost the economy in the short term.
Investors in the U.S. need to pay attention to the currency exchange rate of the euro to the dollar too. A fall in the euro would result in a rise for the dollar. Since everything we buy: stocks, bonds, iPads, are priced in dollars, a rise in the dollar would greatly impact the U.S consumer of said items.
In a few instances, a rise in the dollar would be welcome, but the stock market would hate it. Since 2002 the dollar has declined roughly 35%. And that 35% has helped increase the price of everything from gold to shares of John Deere (NYSE: DE).
However, a rise in the value of the dollar would put pressure on stocks and commodity prices, and a sharp rise in the currency exchange could result in another market meltdown.
The movement of the euro to the dollar over the next few months could shape the global economy and stock market for the next year. Therefore, it's important to understand just how low the euro may decline, or where it may begin to rally.
Is the euro headed lower? And what is the price that it must preserve?
This video takes you through the euro currency answers the question; is the euro a buy or a sell?
Editor, TradeMaster Daily Stock Alerts
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