Euro
Crosses Retreat Across the Board - Forex Market
Sunday, 29 May 2005 GMT - Written
by Boris Schlossberg Senior Currency Strategist at dailyfx.com
In a stunning rebuke to the
Chirac government in France, French voters were the
first European nation to reject the EU Constitution
tonight. According to the latest exit polls almost 56%
of respondents voted No while only 42% voted Yes. Discontent
over the record high unemployment of 10.2% was the primary
reason for the rejection of the pact. The majority of
the French feared that further integration would only
exacerbate the unstable unemployment situation by enabling
competition from new lower wage East European neighbors.
Although voting in other European
countries will proceed as planned, the Constitution
requires unanimous approval in order to be enacted
and the French rejection leaves the EU in limbo, The
EU will not dissolve and the euro will not be abandoned
but tonight’s overwhelming rejection by the
French voters clearly leaves the currency in a weakened
state. One of euro’s claims as a viable alternative
to the dollar was based upon the idea that it would
represent a region as large and economically integrated
as that of the United States. While the EU GDP remains
comparable to that of US, euro bulls can longer argue
that EU market will be as borderless and “friction-free”
of transaction costs as the US market. The long term
implications of this decision, especially in terms
of their impact on the productivity of the European
region may only now be considered by the market.
In its initial reaction, the EUR/USD
dropped about 80 points from Friday’s close,
but remained above the important 1.2500 level. While
the short term trading is following the classic ‘sell
the rumor buy the news” dynamic, the longer
term implications for the price action may not be
as benign for euro longs.
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