PureFX

How The Eurozone Crisis Affects The Euro Foreign Exchange Rate

Wed 8th February 2012

If you’ve had to change euros in the past 18 months or so, then there is a pretty high chance you’ve heard something about the Eurozone debt crisis.

Speaking to your foreign exchange broker on the phone, he or she might have told you: “The euro has strengthened up this morning. It’s all because Greece has received bailout funds from the IMF, increasing market confidence.” Or perhaps: “There are lots of reports about France losing its AAA rating in the papers this morning. This has hurt Eurozone confidence, sending the euro lower.”

In short then, it’s pretty obvious that the Eurozone debt crisis has a big impact on the rates, and how much buying a home in the south of France or the Costa del Sol costs you. But what exactly do rising French yields and Greek debts have to do with a fluctuating euro?

Market Confidence And The Foreign Exchange Rate

It all comes down to how confident investors feel France or Greece can pay their debts.

Because debt in Europe is so high, investors are outright refusing to lend to certain countries, or demanding interest rates on loans that are sky high. For instance, when you read about bond yields on French debt rising, this reflects market perception that France is a less secure investment. Investors therefore charge more to lend to the French government.

It's a similar thing regarding credit ratings. Should France lose its AAA rating for instance, this would reflect a belief among Fitch or Standard & Poor’s (agencies aiming to guide investors) that France is a less reliable place to put money.

In addition, news is coming out of Europe that affects market confidence on a constant basis. For instance, if Nicholas Sarkozy announces he’s increasing taxes on people earning more than a million euros, this might lead investors to think France is in a better financial position, because it has increased tax revenues. On the other hand, it might prompt speculation that France is worse off, because the millionaires could respond by going elsewhere!

In short, whatever market consensus emerges will impact France position among investors. This then prompts higher or lower borrowing costs, in exactly the way I’ve outlined above.

How Does All That Relate To The Euro Foreign Exchange Rate?

Of course, you might ask at this point: what exactly does all this have to do with the euro? It matters, because the euro foreign exchange rate is closely tied to market confidence in Europe. Higher taxes in France affect whether the market invests in the euro just as it affects borrowing rates for the French government. So in short, a great way to find out about euro strength or weakness is to keep an eye in what’s happening on the market!

To find out more about what affects the exchange rates you receive, visit us at foreign exchange specialists Pure FX. You can also call us on +44 (0) 1494 671800 or email enquiries@purefx.co.uk.