Which Currency Will Crash First?

Currencies / Euro
Feb 08, 2011 - 11:24 AM
By: Rosanne_Lim

2010 was an exciting year for currencies. The dollar, euro, the yen, and the yuan all went under the spotlight. Except for the yuan, each experienced drastic swings wrought about by internal or external factors. But overall, these events underwhelmed confidence in paper money. The main reason is because of the sovereign debt crisis that swept the world.

Most of the developed nations including the United States, Japan, and a number of European countries have unsustainable debt. The US and Japan, for example, are heading towards insolvency. Meanwhile, the only reason why several countries in the EU haven’t defaulted is the bail-out by stronger EU members.

This year presents more challenges for the world’s major currencies. While the markets are not as nervous at this point, problems remain just beneath the surface. The truth is that the world has not seen a sovereign debt crisis of the magnitude seen last year. With much of the developed world on the red, this has brought the market at the brink of disaster. We’ll analyze some of the major currencies in this article including the yen, the euro, and the dollar. Developments in China regarding the yuan will also be discussed.

The Euro

It was all over the news in the later part of 2010. Several weaker members of the Eurozone would have defaulted already if they weren’t helped out by stronger members. As it stands right now, Greece, Portugal, Spain, Italy, Ireland, and Belgium are on shaky grounds. A number of countries have had their credit rating slashed, resulting to soaring bond yields that are unsustainable. Taking on new debt has become very expensive.

Greece, the country who was most at risk of default at one point in 2010, saw their yields go up from 6 percent to 13 percent in a single month. Even countries that are not in danger are feeling the effects of the crisis. For instance, the French debt hit a record high on December 20.

Right now, there are rumblings that more European countries may need bailouts to stay afloat. According to Professor Willem Buiter, a chief economist at Citibank, a few EU countries can face financial collapse in the next few months. “The market is not going to wait until March for the EU authorities to get their act together…they are being far too casual.â€