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Markets are selling off around the world following Sunday’s Greek and French elections.One of the big fears is that the new Greek leadership will block cuts necessary for desperately needed bailout funds, which could ultimately send the eurozone into chaos.
A day before the elections, Jim O’Neill, Chairman of Goldman Sachs Asset Management, published his Viewpoints note addressing the matter.
From O’Neill’s note:
If the Greek results reintroduce additional risks and fears of financial contagion across weaker Eurozone countries, then this might also presumably weaken the Euro because of the perception that it may force the ECB to be more accommodative. One might jokingly think, on the contrary, such heightened contagion might influence the Federal Reserve Board more than the ECB. This, however, may not be a joke. As I noted last week, a prominent US thinker remarked at our GSAM Growth Market Summit that the Italian bond yield represented the biggest re-election risk for President Obama. It would be ironic, if not improbable, that a major escalation of Euro area financial contagion influenced the Fed more than the ECB.
O’Neill also discussed the potential outcomes for the French election and its impact on the euro:
The French election, in some ways, is more “fundamental” to the future European policy landscape given the importance of the Franco-Germanic alliance to the Euro project. President-elect Hollande has made it clear in advance that he believes that European economic policy, and ECB policy, should give greater priority to supporting economic growth. Of course, his current German counterparts do not share those thoughts, but many other countries probably do. Although it is true that the ECB is independent, and it might be true that, if elected, President Hollande might not pursue aggressive actions on such matters, at the margin, his appearance on the scene is probably not a EUR/$ positive.
His outlook for the euro:
So here are most of the apparent EUR/$ issues that are likely to remain relevant. It is possibly the case that the Euro may continue to trade in a 1.29-1.35 range for quite some time. It increasingly seems to me that 1.20 is eventually more likely than 1.40. Can we all wait for eventually? There are certainly lots of other things that remain interesting.
Back in December, O’Neill predicted that the euro was more likely to head to $1.10 before $1.50.
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