The Euro’s Downslide Continues

May 30, 2010 Updated: May 30, 2010

The European single currency has continued its downward slide with a 7.7 percent drop against the dollar in May, which marks its sixth consecutive monthly fall and the largest percentage fall since January 2009.

“Confidence in the euro remains low as the region’s credit problems show no signs of a resolution,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest banking group in an interview with Bloomberg. “The euro will remain under selling pressure.”

The international credit rating agency, Fitch Ratings, announced on May 28 that it downgraded Spain’s AAA credit grade, stating that the nation’s debt burden will stunt its economic growth. On May 10 European leaders decided that an estimated $1 trillion package would be devised to correct the region’s debt crisis. Spain had maintained its top rating since 2003.

The downgrade “reflects Fitch’s assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium term,” according to the ratings company.

The viability of the 16-nation currency is becoming controversial, given the poor health of the Greek economy that proliferated the rest of Europe—including Germany, which has also taken its toll. German Chancellor Angela Merkel's recent warning sent shockwaves around the world when she described the “current crisis facing the euro [to be] the biggest test Europe has faced in decades, even since the Treaty of Rome was signed in 1957," she claimed in a speech in Parliament, referring to the treaty that created the European Union.

"This test is existential and it must be overcome. … If the euro fails, then Europe fails," Merkel added.

Given the importance of the survival of the euro what remains to be seen is the continual decay of the euro’s value and the gradual domino effect on major European economic players.