Euro's Rally Ends on German Woes

By Roger Baettig | January 31 2013 9:16 AM

The euro slid on Thursday morning after a two day rally that pushed the currency nearly to $1.36. The euro slipped a bit after poor German data put a lid on optimism in the eurozone, and traded at 1.3553.

Structure showing the Euro currency sign is seen in front of the ECB headquarters in Frankfurt

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After eurozone banks repaid a large chunk of the European Central Bank loans early this week, investor confidence returned and the euro surged. The repayment showed that the region's financial system was finding its feet after a three year struggle, and that banks were making the move toward independent financing.

On Wednesday, the US Federal Reserve kept its promise to ease economic troubles and decided to continue with its 85 billion dollar bond-buying plan. The Fed's decision to aggressively fight unemployment through monetary policy was followed by data showing the US economy contracted in the fourth quarter.

As the euro soared past $1.35, many analysts began to talk about the possibility of the common currency's ability to reach $1.37. However, the surge in financial markets posed a stark contrast to other economic health indicators like unemployment. Record high unemployment figures in just about every country in the EU suggest that the region's financial recovery doesn't paint an accurate picture of the region's economy.

Data from Germany came crashing down on the euro's rally on Wednesday, underscoring those fears. According to Reuters, Deutsche Bank, Germany's largest bank, reported unexpected sizable losses which suggested a disconnect between financial markets and the real economy.

German retail sales data also turned up weak, but the decrease was expected and minimally added to the euro's slide.