Yesterday we published a LearnVest Daily about how the U.S. dollar fluctuates and why it’s relatively strong right now against the Euro, compared to its performance the past couple years. Now, check out today’s news: Despite the downgrading of Portugal’s credit rating (which indicates doubt about its public finances and growth prospects), the Euro is up.
When We Say That A Currency Is “Up” Or “Down,” We’re Still Talking About Pennies
Of course, everything in context. The Euro is still trading at about $1.26, but check out the nuance: It was trading at $1.2596 late in the trading day yesterday, but now it’s climbing ever closer to $1.27. That said, even pennies are extremely important for people who trade in international currencies. The thing to note here is the trend in general—and the reasons behind it.
Portugal’s Credit Rating Is Bad News For The Country And The Euro
A credit rating is a score that tells investors how reliable a borrower—in this case, a country—is. When you lend someone money, you expect to be paid back. The person will pay you some interest in the process, but you’re going to insist on a higher interest rate if you think there’s a real chance that he might go bankrupt and never pay you back at all. In that way, lending money out (or buying a bond) is sort of like making a bet that the person you’re lending to will have the money to pay you back. The riskier the bet—the more likely the person is to go bankrupt and not return you money—the more profit you could make through higher interest rates. A country’s credit rating tells investors (people like us who might buy a Portuguese bond) how likely we are to get our money back. Since Portugal’s credit rating was just lowered—meaning that it’s deemed a less reliable borrower—it’s going to have to pay a higher premium to borrow money. That’s bad news for it and other countries that depend on the Euro.
All The Same, Greece’s Bond Situation Is Starting To Look Better
The big news story for the past while has been Greece’s economic crisis. Greece’s turmoil has been a big contributing factor to the recently-shaky Euro. But, despite Greece’s woes, the situation is starting to look sunnier. Greece just completed its first test of the debt markets since accepting money as part of a bailout package, and the results were relatively favorable. Strategists have deemed the results of this test to be pretty encouraging, which makes people think that the European debt crisis is subsiding, at least temporarily. Thus, people are breathing more easily.
Back To The Value Of The Euro: It’s About Confidence
Although the news about Portugal’s credit rating is a blow that did put some pressure on the Euro at first, but the news about the ever-stressful Greek crisis has gone a long way to improving investors’ confidence. And, by extension, the Euro is on the rise... For now, at least.