What Will Happen Next to the Euro
The borrowing of money by large institutions can have a huge impact on currency prices. This can be seen in the Euro Zone especially where banks have cut back on their borrowing. Recently, this amount being borrowed has decreased by about 20 billion Euros, a massive amount by any measure. Additionally, these banks currently have a large surplus of cash. This has been a result of banks looking for longer termed loans, and therefore less of a need for obtaining shorter termed loans. The European Central Bank is hoping that this will help cut into the region’s debt crisis and help relieve some of the monetary strain that Europe is currently under.
The Euro’s price has dropped considerably in relation to the U.S. dollar over the last three months. The surplus cash held by European banks has helped a little bit, but the debt crisis has overshadowed this. Prices have dropped from 1.42 EUR/USD down to 1.28 over the last three months, showing the world just how precarious the debt crisis is. Meanwhile, banks are fighting to keep the Euro’s levels as high as possible in order to encourage more borrowing. It is estimated that the amount of cash on hand for these banks will be higher this year than levels were last year.
Borrowing rates remain low in Europe. This is to encourage more borrowing and thus more demand for the Euro. This is one of the ways that banks are handling their debt crisis. Increased borrowing would lead to more money for the ECB, and thus lessen the threat of whole nations defaulting on their loans.
Recently, the ECB has lessened the amount of money that banks must keep on hand by half. This is supposed to increase the amount of expendable cash that banks have on hand and raise the amount of money that can be borrowed. Again, this liquidity will help to increase demand. The more people that borrow the Euro, the less the threat of default. This makes buying the Euro now a potentially lucrative investment. It has been shown that the Euro can perform at high levels in the past. There is a good chance that the Euro can repeat this in the future once it gets past the current problems.