What now for euro, as the Greek debt crisis worsens?

As the Greek debt crisis continues to worsen, the euro looks poised to slip further.

The euro zone debt crisis never went away ever since it first erupted in early 2010. The fundamental problems – that certain peripheral members can’t possibly pay back their sovereign debt – wasn’t solved.

To exacerbate the problem, austerity measures – touted as a solution – dampens economic growth and thus lowers tax revenues. Moreover, protests and strikes against these measures endanger their implementation and temporarily shut down entire sectors of the economy, like the latest strikes in Greece has done to many public services there.

The euro currency, though, only responds to the euro zone debt crisis when it’s not trumped by more important trends.

In April 2010 and November 2010, the euro plunged on the woes of Greece and Ireland, respectively, because they were the biggest news at those times. However, in April of 2011, Portugal’s worsening debt crisis didn’t affect the euro at all.

In fact, the euro surged 4.5 percent that month against the dollar because EUR/USD was dominated by expectations of an interest rate hike from the European Central Bank (ECB) and the pervasive weakness in the US dollar.

That run ended on May 5 when European Central Bank (ECB) President Jean-Claude Trichet left out the “strongly vigilant” phrase from the ECB's monetary policy statement, leading investors to realize that their expectations for interest rate hikes have been too optimistic.

The euro plunged on May 5. In the days that followed, it became responsive again to the euro zone debt crisis and thus declined some more on negative headlines from Greece. Going forward, it’s likely to continue to lose ground because the euro zone debt crisis will continue to generate negative headlines.

The euro, however, is not doomed.

One, as it falls, German exports and economic growth will soar and provide a healthy counterweight to peripheral woes. Two, China has a vested interested in preserving the euro and will therefore buy it if it falls too low.

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