Daily Report: Euro Mildly Lower On Debt Worries, But Downside Limited

Euro opens the week mildly week against dollar and yen as last week's retreat continues. There were more talks on restructuring Greek debts over the weekend. In Germany, Deputy Foreign Minister Werner Hoyer said a Greek sovereign debt restructuring 'would not be a disaster'.

Hoyer added, 'whether all [the efforts to reform] this is enough, whether the results will be there soon enough, is a different question. We are looking at the economic developments, the fiscal developments in Greece and we are worried'. Debt crisis in the region is reemerging. The situation in Greece remains fragile after it received a bailout from the EU and the IMF last year. Markets are concerned that the fates of Ireland and Portugal may be similar despite bailouts. Finland's situation also gives Euro some mild pressure after the True Finns party wont 19% of the vote in the weekend's election. The party is know to be against bailouts for deeply-indebted Eurozone counterparts. The increase change for becoming part of coalition government now also raises changes of opposition to further bailouts and could theoretically prevent EU from granting new rescues.

Nevertheless, the common currency will likely continue to be supported by rate expectations and recent up trend against dollar and yen are expected to resume sooner or later. ECB Executive Board member Jose Manuel Gonzalez-Paramo said that "a 25-basis-point increase like that on April 7 may not be convenient for those countries who are behind in their recovery, but the ECB cannot hold off its mandate because of that," which is to maintain price stability. Bundesbank President Axel Weber see "significant increase in inflationary pressure." Weber noted that "if global price pressure continues -- there have been few signs in IMF discussions that this will change over the rest of the year -- one has to expect a further normalization of monetary policy in view of the price outlook.” Governing Council member Ewald Nowotny said market expectation of another 50 bps hike from ECB is "well founded" and "the exact timing is a matter to be decided according to the economic situation." Governing Council member Luc Coene said interest rates are "still too accommodative" and have to be adjusted.

The China government obviously concerns about rising inflation and overheating economic growth in the country. The PBOC announced over the weekend that it will raise the reserve requirement ratio (RRR) by 50 bps to 20.5%, effective April 21. Governor Zhou Xiaochuan stressed that monetary tightening will continue for 'some time'. This 4th hike was expected as China's CPI jumped to 5.4%yoy in March, the fastest pace since 2008. The tightening process remains in progress and more rate hikes will be seen later in the year. While the government has been trying to avoid involving RMB appreciation as a means to combat inflation, it appears to be a more effective tool than merely using rate hikes and RRR increases.

Market overview