Euro May Strengthen, But Not in 2011

The euro experienced a staggering slide in 2010, but it wasn’t as impressive as many pessimistic forecasts would let us believe. Still, the debt problems in the European Union persist and the crisis is spreading, therefore 2011 doesn’t look like a very good year for the shared European currency.

The potential problems in the so-called PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain) have grown into a full-fledged crisis, which tends to spread across the European countries. Greece is already nearing default and Ireland isn’t in a much better shape. Italy seems to hold for now, but Portugal and, especially, Spain are expected to cause a lot of problems for the Eurozone. The Forex Crunch explains that Spain’s debt is much more dangerous for the Eurozone as Portugal has a comparatively small economy and may be rescued by the present EU bailout fund, but Spain’s economy is simply to big to be easily rescued.

The major reasons for the problems in the peripheral economies are high unemployment, the real estate bubble and unhealthy business conditions. Italy managed to avoid a collapse of the real estate market, but Portugal and Spain weren’t so lucky.

In spite of the negative factors, talks about disintegration of the euro and a collapse of the Eurozone are much less widespread than at the beginning of 2010. Germany supports the economical health of the EU with its strong economy and, as well as other major European power – France, it isn’t likely to allow the Union to break down. There are speculations that China is going to help its major trading partner and the International Monetary Fund may provide some aid.

Anyway, one shouldn’t put too much faith in the euro. Even if the currency would strengthen some day in the future, that isn’t likely to happen in 2011. In fact the European government might prefer a weaker currency, despite all the officials would say, as it would support the already impressive German exports, helping the EU economy to recover.

A weakness of the US and Great Britain economies may drive the dollar and the pound lower versus the euro, but even that isn’t certain. Against other currencies the future of the euro looks even grimmer. EUR/USD may experience spikes to $1.36, but most economists agree that the currency pair will decline below $1.20, though parity isn’t expected. The Investment U advises to buy a two-year put option as a way to profit from the expected sharp moves of the euro.

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