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New prime minister villepin supports status quo { May 31 2005 } Original Source Link: (May no longer be active)
http://news.ft.com/cms/s/41125fce-d1bd-11d9-8c82-00000e2511c8.htmlhttp://news.ft.com/cms/s/41125fce-d1bd-11d9-8c82-00000e2511c8.html
Euro falls further as Villepin named PM
By Steve Johnson in London
Published: May 31 2005 11:26 | Last updated: May 31 2005 17:23
The euro tumbled to fresh lows on Tuesday as the continuing fallout from France’s No vote on the proposed EU constitution was exacerbated by the appointment of Dominique de Villepin as the new French prime minister.
The unelected former interior minister was given a thumbs-down by the market, which saw him as less reform minded than rival Nicholas Sarkozy, the leader of the ruling UMP party.
“Villepin is viewed as maintaining the status quo. He support the ‘French economic model’ and does not see any need for urgent reform,” said Hans Redeker, global head of forex strategy at BNP Paribas.
“France will lose precious time for reforming its outdated economic system and is likely to fall back further,”
Tony Norfield, global head of forex strategy at ABN Amro, argued the French political class had already seen its legitimacy to institute painful economic reforms shattered by the humilating No vote, a problem unlikely to be aided by the introduction of an unelected prime minister.
Mr de Villepin’s track record as a vocal opponent of the US-led invasion of Iraq was also singled out by some as potentially problematic.
“He has not exactly ingratiated himself with many American with his attitude over the Iraq war,” said Rob Carnell, economist at ING Financial Markets.
Mr Redeker argued Mr de Villeprin’s confrontational past was “not very promising from a foreign direct investment point of view.”
The euro tumbled 1 per cent to a fresh seven-month low of $1.2349 against the US dollar, its sharpest fall for two months.
The shared currency also fell 1 per cent to a four-month low of Y133.33 against the yen, 1 per cent to £0.6773 against sterling and 0.5 per cent to SFr1.5364 against the Swiss franc.
Mr Norfield saw long-term investors such as pension funds and insurance companies, as well as the ubiquitous hedge funds, selling euros, with much attention now focussed on whether Japanese bond investors follow suit.
Divyang Shah, global strategist at IdeaGlobal, said the eurozone’s new-found political uncertainty would force central bank reserve managers to stick to dollar-denominated assets.
However much of the euro’s fall was doubtless driven by technical factors, with the breach of a key support level of $1.2460 opening the way for the euro to fall to around $1.21.
Moreover the euro has now fallen 11.1 cents against the dollar from its year-to-date high, set in March, a larger retracement than seen in either 2002, 2003 or 2004, and another bearish sign for those who set great store by such things.
David Bloom, currency analyst at HSBC, also saw asymmetric risk ahead, with euro-dollar likely to fall significantly if Friday’s US payrolls beat expectations, but the euro unlikely to gain much if the jobs reading undershoots.
Nevetheless few people were altering their medium to long-term euro forecasts yesterday, with Mr Bloom arguing that the prospects for economic reform could not be priced-out of the euro, because they were never priced-in in the first place.
The gloom did not spread to central and eastern European currencies that are quequing to join either the euro or the European Union.
The Czech koruna firmed 0.3 per cent to Kc30.37 to the euro while the Turkish lira rose 0.8 per cent to TL1.354 to the dollar.
Indeed, the dollar retreated from earlier highs as the Chicago purchasing managers’ index fell to a near two-year low, echoing recent weakness in the Philadelphia and Empire indices.
Despite the Conference Board’s measure of consumer confidence beating expectations, the dollar handed back early gains to sit little changed at Y107.97 against the yen and $1.8232 against sterling, and 0.4 per cent softer at C$1.2517 against the Canadian dollar.
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