The euro shot lower yesterday, trading with a 1.23 handle as the market digested news that eight Danish banks had been downgraded. Although any fears inspired by the downgrades are really secondary to the problems in the European Union for most, such events still show that today's problems are deeply rooted, and additionally increase concerns over the potential for a banking system spread. If even a few banks or countries default, it will be imperative for the monetary authorities to stop a contagion that could bring about another cataclysm like that of 2008.
But some reassurance was also provided last night with the announcement that the European Union might give Spain an extra year to lower its deficit to 3%. This may be considered "kicking the can down the road", but it is nonetheless necessary, as the problems are both profound and complex, and the markets and economies alike need time to both digest the current state of affairs and recover from it. Unfortunately, this could simply create more problems, as policymakers must judge whether more systemic risks can be contained while bringing deficits and economies to a sustainable long-term state.
The euro was supported ahead of 1.2350, but it feels like it's only a matter of time before there is another move lower - especially with comments out of Italy stating that their country's position is hugely threatened by the possibility of contagion. It's been a steady grind lower so far, but there is certainly room to fall further. It might just be a question of when.
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