It's not hard for vacationing tourists to become irritated by German holiday-goers who neatly lay out their pool towels seemingly before the sun is up. And with stories emanating that Germany is rolling out a Plan B in order to shore up its bankers in the event that Greece fails to qualify for its next bailout payment, it appears that Chancellor Merkel has already unrolled the nation's beach towels in an effort to deal with more collateral damage, which some claim will signal the break-up of the euro area in its current form. The euro has now shed 10 cents against the dollar in the space of two weeks with the second half of that decline taking just three trading sessions. While we have had our senses dulled during the last two years over the perilous health in Athens on account of European leaders pulling in the same direction, this time it looks like the head has been cut from the rose. German officials assessing the Greek books as fiscal austerity bites in to the corpse of a necrotic economy find little progress to report. The flagging Greek economy means that the nation faces the real possibility of failing to jump the hurdle this time around.

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Euro -And so the single European currency unit fell sharply as the week began tumbling to its lowest since February versus the dollar and a decade low against the yen. We don't need any data to confuse the issue on Monday to tell us that the core is holding up while the periphery continues to struggle. The reality is that German confidence in the situation is diminishing and the risks of falling in to an economic whole the world over have picked up markedly during the last several weeks. Investors sold stocks around the world and once again Monday is shaping up to be another bad session for North American equities in line with sliding European bourses. French banks saw double-digit losses as fears grew that its largest three banks would suffer an imminent downgrade at the hands of Moody's Investor Services. The ratings agency put the banks on review in June for fear that the possibility of a Greek default was not adequately reflected in their current grade. The Greek Cabinet ushered in fresh measures to raise revenues in order to meet sky-high savings targets. This year the government must cut spending and raise revenues by €17.1 billion and by €14.9 billion in 2012. A two-year property tax was announced over the weekend while elected officials will have one-month's salary used to plug the gap. The euro hit a low at $1.3503 before recovering to $1.3630, while it lost 0.8% against the yen to buy ¥105.00.

U.S. Dollar - The dollar feels a far better place to be according to the actions of many investors during the past couple of weeks. The President will deliver the text of his proposed $447 billion economic stimulus package to lawmakers on Monday, while we will have to wait for another week before hearing more from the Fed's Open Market Committee on whether they have further plans to ease monetary policy. The prospect of more quantitative easing without expanding the Fed's balance sheet is seen as a currency positive these days and has propelled the dollar index to a seven- month peak. Against its basket of major trading partners the greenback trades at 77.26.

Japanese yen - The dollar's advance still left it weaker against the yen on growing risk aversion buying with the key spot rate trading at ¥77.02. Earlier in the overnight session the dollar traded with a gain and remained close to its best level in two weeks. Demand for the yen remained high with the unit making an advance of at least 1% against all of its major partners earlier in the session. Gains were, however, pared even as European stocks built on losses of 2.3% for Asian equities and as anxieties built ahead of U.S. trading. The yen rose against the pound to ¥122.19 for its strongest performance since January 2009 when global financial pressures built ahead of a March-time capitulation for equities at least.

British pound - The pound reversed an earlier loss against the dollar rebounding on account of its status as a euro currency alternative. The recent action by the SNB to cap the Swiss franc has bolstered the British unit given the diminishing likelihood of appreciation in the franc. The pound reversed a loss to $1.5794 before turning positive on the session. Sterling recently traded at $1.5874.

Aussie dollar - The Aussie shed about two cents on Monday against the dollar as investors ditched the unit for fear that mounting Eurozone pressures would continue to dull appetite for higher-yielding units. But having said that the yield premium is fast-becoming eradicated through the forwards market. Less than two weeks ago investors priced in a one percent reduction in monetary policy from the Reserve Bank in response to the growing threats to global growth. As the threats deepen investors on Monday moved to predict an escalation in the timetable and scope of monetary policy reduction and now see 140 basis points off short-term rates in the forthcoming year. The Aussie rebounded from a session low at $1.0280 U.S. cents before it steadied at around $1.0319.

Canadian dollar - The Canadian dollar crossed parity for the first time in about a month as risk aversion spread making for the second brief occasion since February 1. As the summer picked up heat and as the credit-crunch took a late July break the Canadian unit had made gains to almost $1.0600 against the greenback. But as fears for growth mount and as speculative flows continue to undermine recent commodity market gains, more sellers are showing up to test the loonie. The unit fell earlier to buy less than a dollar at 99.76 U.S. cents and remains steady at exactly parity in early morning Manhattan trading.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

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