Is the Worst Over for the Euro Zone?

Indeed, the tides have changed! It seems like it was only yesterday when EUR/USD was trading around 1.2000. But now, the pair is back to where it pretty much was in the beginning of the year, around 1.3000, strongly recovering from its yearly low of 1.2136 in August.

Doing the math, that means that the shared currency has risen about 8% in the past few months. What has been driving up the euro?

It boils down to the fact that the additional aid provided to Greece has reduced the risk of an immediate default for the country, and more importantly, a contagion in Europe. Remember that after days of arguing among EU policymakers and IMF officials, Greece was able to secure more money (44 billion EUR) to recapitalize its banks.

More than keeping Greece from a default though, the last-minute debt deal is conducive to the country’s economic reform plan, making its debt sustainable.

But wait, there’s more! Euro bulls were also overjoyed by the news that Spain FINALLY swallowed its pride and admitted that it needs a bailout. Earlier this week, the Spanish government formally requested an EU bailout to the tune of 39.5 billion EUR to help recapitalize four of its troubled banks.

The European Commission quickly approved these plans to shore up Spain’s banks, even allowing three Spanish national banks to tap the EU credit line. Market watchers are hopeful that these measures could eventually enable euro zone’s fourth largest economy to clean up its financial mess.

For now, it seems that all is well in the euro zone, as reflected by the euro’s recent rallies and the drop in bond yields of EZ nations. To further prop up sentiment in the region, EU finance ministers expressed their confidence in Greece’s bond buyback plans, which they believe would prevent the debt crisis from getting worse.

On top of that, finance ministers are also currently working on forming a single banking supervisor which could protect the euro zone from another debt crisis.

But despite all these positive developments in the euro zone, it won’t hurt to stay vigilant for any possible shifts in sentiment. You never know if there’s another major credit rating downgrade or negative revisions on growth forecasts waiting in the wings! Do you think the euro’s rally could last until the end of the year though? Let us know by voting through the poll below!