Economists have also warned that the Greek financial system could crumble within weeks or days unless the ECB (European Central Bank) steps up support.

Greece’s President Karolos Papoulias told party leaders that banks had lost €700m in withdrawals on Monday alone as citizens rush to pre-empt capital controls and a much-feared return to the Greek drachma.

He cited central bank warnings that “great fear” might soon escalate to panic. The leaked details lend credence to claims that capital flight by both savers and firms have reached €4bn a week since the triumph of anti-bailout parties in May this year.

Run on Greek Deposits

Greek banks have lost 30 percent of their deposits since late 2009. The total fell to 171 billion euros in March. “The surprise is that there is still so much left. I can’t believe it will stay much longer.” said Simon Ward from Henderson Global Investors.

Greeks have withdrawn hundreds over a billion euros from banks in recent days as the fears grow that the country might be forced out of the euro zone, although there has been no sign of a run on Athens bank branches.

Not a Matter for the ECB?

ECB President Mario Draghi said that under the EU treaty, it wasn’t his job to decide what happened to Greece.

“I want to state that our strong preference is that Greece will continue to stay in the euro zone. Since the treaty does not foresee anything on an exit, this is not a matter for the ECB to decide.”

Meanwhile, the European Central Bank has stopped offering liquidity to some Greek banks it does not consider solvent, and international concern about the euro zone rose as Athens called new elections that look set to be won by parties opposing austerity measures.

Risk of Contagion

The risk of the contagion spreading from Greece to bigger European economies that are vulnerable due to high debt or weak banks has sent stock markets and commodity prices tumbling, and driven Europe’s single currency towards its lowest levels this year.

“The core question will be not Greece, but Spain and Italy.” World Bank President Robert Zoellick said on Wednesday.

Political colouring of Europe’s leaders is rapidly changing. Ms Merkel has just suffered what she described as a “bitter and painful defeat” in an important state election. Her Social Democratic opponent argued that absolute austerity was wrong.

Then on Tuesday, the new French president, François Hollande, turned up in Berlin to meet the German Chancellor saying much the same thing. And in the Netherlands, traditionally a defender of financial rectitude, the tide is turning. Dutch voters, shortly to go to the polls, are becoming disenchanted with austerity.

Big Fall for the Euro Ahead?

As far as Greece is concerned, the majority of Greeks want to remain a country that uses the euro as their currency, however most are also opposed to the severe austerity measures being forced on them.

There is no real possibility that Greece can have it both ways, therefore one has to go and our prediction, along with many others is that a new government of Greece will have to return the country back to the drachma. This will have a big effect on how financial institutions view the stability of the euro currency and with that in mind, a realistic fall of up to 30 percent should not be ruled out. The only question remains is how fast can the euro fall from here.

On A Rally – Dollar Index

The ICE US Dollar Index, which tracks the US dollar against six major world currencies was trading at 81.565 – 09.47 GMT today, from the session open of 81.504.

Euro Battering

The euro has suffered a serious battering this week, tumbling to a four month low of $1.2747 against the US dollar on Wednesday, May 16, as investors study the Greek situation with a growing sense of unease and reports emerge of Greek depositors withdrawing funds from Greek banks as the country’s fate hangs precariously in the balance.

Meanwhile, the European Central Bank said it will temporarily stop lending to some Greek banks to limit its risk as President Mario Draghi signaled the ECB won’t compromise on key principles to keep Greece in the euro area.

Steen Jakobsen from Saxo Bank said outflows from Greek banks are becoming unstoppable, not helped by open talk in EU circles of `technical’ plans for Greek withdrawal.

“This has a self-fulfilling prophecy built into it and I don’t think we can get to June. The fuse is burning and the only two options now are a controlled explosion where Germany steps in to ensure an orderly exit, or an uncontrolled explosion,” he said.

Banking giant JP Morgan believe that Greek banks have already exhausted their collateral. A refusal by the ECB to ease rules would amount to expulsion, forcing Greece “to issue its own money.”

The dollar’s longest string of gains since 2008 came late last week, as investors sought safety amid worries about the health of Spain’s banks as well as Greece’s potential exit from the euro zone.

Latest Dollar Index Rate

The ICE US Dollar Index, which tracks the US dollar against six major world currencies closed Friday’s trading session at 80.435.

The forecast for next week remains positive for the dollar after the euro slid to a 3-1/2-month low in volatile trade on Friday. The euro has dropped against the dollar in eight of 10 sessions for a cumulative 2.4 percent decline, hit by the turmoil in Greece.

Greece Talks Prove Futile

Critical last ditch talks to form a coalition government in crisis-struck Greece floundered once more today, leading the country one step closer to new elections, although the socialist party leader said he retained ‘existing but limited’ optimism for a deal.

If no agreement is reached, Greece will have to hold new elections next month, most likely on June 10th or 17th, adding further pressure on the euro to fall further against major currencies.

More Protests in Spain & UK

Meanwhile, thousands of Spaniards fed up with economic misery and waving banners against bankers marched on Saturday to mark the first anniversary of the grassroots “Indignados” movement that has sparked similar protests around the world.

Up to 600 people denouncing the Bank of England rallied in London and a witness said scuffles broke out between some demonstrators and police, with at least 12 arrests.

Latest Dollar Index Rate

The ICE US Dollar Index, which tracks the US dollar against six major world currencies was trading at 79.485 – 09.37 GMT today, from the session open of 79.140.

The ICE Dollar Index slid on Friday after the release of some well received US earnings and a surprise rise in a German business confidence gauge. The euro currency fell to $1.3195 Monday, down from $1.3219 in late trading Friday.

The US currency was up against the yen, with USD/JPY trading up 0.06 percent at 81.57, and up against the Swiss franc, with USD/CHF up 0.13 percent and trading at 0.9102.

The dollar was up against its counterparts in Canada, Australia and New Zealand, with USD/CAD up 0.14 percent at 0.9936, AUD/USD down 0.12 percent at 1.0367 and NZD/USD down 0.13 percent at 0.8176.

French Elections

The euro was weaker against the US dollar and yen during Asian trading Monday, following French President Nicolas Sarkozy’s poor showing in Sunday’s first round of France’s presidential vote.

Sarkozy came in second to Socialist François Hollande, who garnered between 27-28 percent of the vote compared to Sarkozy’s 25-27 percent, according to pollsters.

Attention will now focus on a run-off between Sarkozy and Hollande on May 6, with some market analysts suggesting victory for Hollande might weaken the euro.

Spanish Economy Contracts

Spain’s central bank said Monday that the country’s economy contracted 0.4 percent in the first quarter from the fourth, evidence that a worsening downturn is making it tougher for Madrid to reach ambitious austerity targets.

On an annual basis, the economy contracted 0.5 percent, the first negative reading after seven consecutive quarters of modest growth, the Bank of Spain said in its monthly economic report. This marks the official end of a mild recovery between late 2010 and late 2011, after a deep slump started in 2008 in tandem with the country’s property bust.

The central bank also said that Spain’s economy, the fourth largest in the euro zone, faces a series of quarters of uncertainty and downside risks, related with developments in the euro-zone debt crisis.

Spain’s borrowing costs surged Monday amid renewed concerns on the short-term prospects in the monetary area, with the yield on the benchmark 10-year bond rising above the psychological 6 percent level. Spain’s debt insurance costs hit a fresh record, with the five-year credit default swap eight basis points wider at 510 basis points.

Dutch Government Collapse

The Dutch government teetered on the verge of collapse on Monday after an anti EU party refused to back big deficit cuts, creating a new hurdle for euro zone leaders who are already struggling with a pact on overcoming the bloc’s budget problems.

Prime Minister Mark Rutte’s cabinet was due to meet at 07.30 GMT to discuss whether it can push through budget cuts to meet EU targets after the political crisis broke at the weekend, and whether to offer its resignation.

The prospect of new elections pushed up borrowing costs for the Netherlands, traditionally one of the strongest euro zone economies, as the country was drawn into Europe’s debt crisis and elections appeared almost inevitable.

In the European foreign exchange market, the euro was weaker against the US dollar. The euro was recently trading at $1.3180, from $1.3215 late Friday in New York. against UK sterling, the euro hits a new 12 month low of 1.224 euro.

French Elections

“The euro will have to contend with political events as it digests the aftermath of the first round of the French presidential elections. The fact that the political process will continue to a second round on 6 May could act as a constraint on the euro,” said Crédit Agricole Corporate & Investment Bank.

The euro and the dollar exchange rate “will largely remain within its recent range although developments in Spain and Italy and their debt markets will have the potential to invoke larger moves in the euro,” it added.

European Business Data

April’s PMI for the euro zone’s dominant service sector fell to 47.9 from 49.2 in March – a five-month low and worse than any forecast in a poll of more than 40 economists which projected a rise to 49.3.

The services PMI slipped further below the 50 threshold that divides growth from contraction in April, while factories endured their worst month since June 2009.

“We were saying last month that we probably had a second consecutive quarter of decline (in business activity), making a recession – now that’s extending into a third quarter,” said Chris Williamson, chief economist at PMI compiler Markit.

Order books brought no joy for services companies in April, with the services new business index slumping to a six-month low of 45.4, from 47.6.

“There are no real drivers of growth here, which suggests that although the overall rate of decline is modest at the moment, we could see it continue to worsen in coming months.”

The demand for the 10 year bonds was almost twice the amount sold.

“Overall, then, a reasonable set of results which will go some way to allaying fears the domestic bid [demand] for Spanish bonds has dried up.” said Richard McGuire, rate strategist at Rabobank.

There had been worries about this week’s bond auctions after the interest rates on existing 10 year bonds rose above 6 percent on Monday. Borrowing costs above 6 percent are considered by many analysts to be unaffordable in the long run.

“Until we see signs that the government is implementing the medium-term fiscal consolidation programme and signs of life in the Spanish economy, investors are going to worry about the trajectory of the debt to GDP ratio in the medium term,” said Nick Stamenkovic, bond strategist at RIA Capital Markets.

Too Big to Bailout

Analysts say Spain is probably too big for Europe to bailout. Its problems have added to ongoing worries about global economic growth.

Angst about the dire state of the Spanish banks increased overnight after fresh figures showed that their bad debts have climbed to the highest level in around 18 years. According to the figures from the Bank of Spain, 8.16 percent of the loans held by Spanish banks – or €143.8 billion ($US188.7 billion) – were at least three months late in their repayments in February.

Spanish banks have been hit with crippling losses on their loans to construction companies and property developers since the country’s massive real estate bubble burst in early 2008. But many predict that the banks’ problem loans will surge even further as the Spanish economy falls deeper into recession, and as housing prices continue to fall.

Figures released by the Spanish government overnight show that the fall in Spanish house prices is picking up pace. House prices in the first three months of this year were 7.2 percent down from their level a year ago, and 3 per cent lower than in the final three months of 2011. All the same, many analysts believe that Spain’s housing market remains overvalued, and that housing prices could suffer further sharp declines as the country falls deeper into recession, and unemployment pushes even higher.

Many critics argue that the ECB’s move to douse the European banking system with €1 trillion in cheap three-year loans has put the Spanish banks in an even more fragile financial position. Spanish banks were able to use the ECB money to play the ‘carry trade’. They borrowed from the ECB at a 1 percent interest rate, and earned a handsome profit by investing the money in high-yielding Spanish government bonds, and for a while this stabilised Spanish bond markets.

But investors are now worried that Madrid will fail to meet its deeper ambitious plans to reduce the budget deficit from 8.5 percent of GDP in 2011 to 5.3 percent this year.

As a result, they’ve been dumping Spanish bonds, which has pushed bond prices sharply lower and sparked fears that Spanish banks now face hefty massive losses on their bond portfolios.

The Big Question

As first quarter financial results are published, the official verdict for Spain is: back in recession. All signs of the very modest return to growth seen at the beginning of last year are gone and the shadow of the EU bailout now extends across the Iberian peninsula, with more and more predictions that Spain will soon join Portugal in needing rescue funds.

The big question from the beginning of the bailout operations, however, is whether the monetary union can withstand a bailout of a country of systemic importance and the size of Spain.

In March the eurozone finance ministers agreed on a long awaited combination of the two rescue funds – the temporary European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM) with a joint lending capacity of 800 bn euros – not all of which is real available money.

The demand for the 10 year bonds was almost twice the amount sold.

“Overall, then, a reasonable set of results which will go some way to allaying fears the domestic bid [demand] for Spanish bonds has dried up.” said Richard McGuire, rate strategist at Rabobank.

There had been worries about this week’s bond auctions after the interest rates on existing 10 year bonds rose above 6 percent on Monday. Borrowing costs above 6 percent are considered by many analysts to be unaffordable in the long run.

“Until we see signs that the government is implementing the medium-term fiscal consolidation programme and signs of life in the Spanish economy, investors are going to worry about the trajectory of the debt to GDP ratio in the medium term,” said Nick Stamenkovic, bond strategist at RIA Capital Markets.

Too Big to Bailout

Analysts say Spain is probably too big for Europe to bailout. Its problems have added to ongoing worries about global economic growth.

Angst about the dire state of the Spanish banks increased overnight after fresh figures showed that their bad debts have climbed to the highest level in around 18 years. According to the figures from the Bank of Spain, 8.16 percent of the loans held by Spanish banks – or €143.8 billion ($US188.7 billion) – were at least three months late in their repayments in February.

Spanish banks have been hit with crippling losses on their loans to construction companies and property developers since the country’s massive real estate bubble burst in early 2008. But many predict that the banks’ problem loans will surge even further as the Spanish economy falls deeper into recession, and as housing prices continue to fall.

Figures released by the Spanish government overnight show that the fall in Spanish house prices is picking up pace. House prices in the first three months of this year were 7.2 percent down from their level a year ago, and 3 per cent lower than in the final three months of 2011. All the same, many analysts believe that Spain’s housing market remains overvalued, and that housing prices could suffer further sharp declines as the country falls deeper into recession, and unemployment pushes even higher.

Many critics argue that the ECB’s move to douse the European banking system with €1 trillion in cheap three-year loans has put the Spanish banks in an even more fragile financial position. Spanish banks were able to use the ECB money to play the ‘carry trade’. They borrowed from the ECB at a 1 percent interest rate, and earned a handsome profit by investing the money in high-yielding Spanish government bonds, and for a while this stabilised Spanish bond markets.

But investors are now worried that Madrid will fail to meet its deeper ambitious plans to reduce the budget deficit from 8.5 percent of GDP in 2011 to 5.3 percent this year.

As a result, they’ve been dumping Spanish bonds, which has pushed bond prices sharply lower and sparked fears that Spanish banks now face hefty massive losses on their bond portfolios.

The Big Question

As first quarter financial results are published, the official verdict for Spain is: back in recession. All signs of the very modest return to growth seen at the beginning of last year are gone and the shadow of the EU bailout now extends across the Iberian peninsula, with more and more predictions that Spain will soon join Portugal in needing rescue funds.

The big question from the beginning of the bailout operations, however, is whether the monetary union can withstand a bailout of a country of systemic importance and the size of Spain.

In March the eurozone finance ministers agreed on a long awaited combination of the two rescue funds – the temporary European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM) with a joint lending capacity of 800 bn euros – not all of which is real available money.

Spanish Central Bank governor Miguel Ángel Fernández Ordóñez has had an unenviable position over the last few days, warning that the Spanish government could soon struggle to meet its financial commitments, while attempting to defend unpopular reforms and offer hope that further catastrophe can be avoided.

Ordóñez denied the need for an EU bailout, saying there are “thousand of possibilities,” but clearly others are not convinced.

The euro currency hit a session low of $1.3087 against the US dollar yesterday, falling around 0.3 percent on the day.

Market players said the euro could come under further pressure ahead of a Spanish bond auction on Thursday, and poor demand and high yields at the auction would aggravate concerns about Spain’s fragile fiscal position.

“The euro is in a very narrow trading range as we wait for tomorrow. There is a lot of uncertainty in the market and people will speculate on a bad outcome, which should be a burden for risky assets,” said Lutz Karpowitz, currency strategist at Commerzbank.

The euro has traded roughly between $1.30 and $1.35 since January, and has struggled to rise above $1.32 since early April. CitiFX Wire said in a note that its traders were looking to buy the range-bound currency on dips.

IMF Warns on Euro Collapse

The eurozone could break up and trigger a global economic slump to rival the Great Depression, the IMF warned last night. In its World Economic Outlook report, the International Monetary Fund said the collapse of the crisis torn single currency could not be ruled out.

It was the first time the Washington based institution has accepted the prospect of the eurozone splitting up and follows fears over the health of the Spanish economy.

“Things have quietened down but there is a very uneasy calm. I have a feeling that at any moment things could get very bad again.” said IMF chief economist Olivier Blanchard.

Speaking at the launch of the half yearly report in Washington, Mr Blanchard said there was no plan in place to deal with a country leaving the euro.

Latest Dollar Index Rate

The ICE US Dollar Index, which tracks the US dollar against six major world currencies was trading at 79.800 – 09.33 GMT today, from the session open of 79.627.

Euro Data & Debt

German investor sentiment unexpectedly rose in April for the fifth straight month. And Spain was able to sell more than $4.2 billion in debt Tuesday. Demand was strong, even though Spain’s borrowing costs have risen in the past few weeks on concerns that the country may need a bailout.

The euro rose to $1.3139 per US dollar in late trading Tuesday from $1.3134 late Monday.

However, the euro dipped against the dollar this morning after the French President said a strong euro hurt exporters and should be discussed with the European Central Bank, and it looked set to stay under pressure with investors still wary of Spain’s fiscal problems.

Traders cited selling by Swiss investors after French leader Nicholas Sarkozy said the euro’s exchange rate should be up for discussion with the ECB.

The common currency hit a session low of $1.3087, falling around 0.3 percent on the day. The move erased modest gains made the previous day on upbeat earnings from US companies, decent demand at a Spanish bill auction and a better than expected German ZEW sentiment survey.

Market players said the euro could come under further pressure ahead of a Spanish bond auction on Thursday, and poor demand and high yields at the auction would aggravate concerns about Spain’s fragile fiscal position.

Dollar Index – Near term Targets

The Dollar Index possible target in the near term include 81.78, a 38.2 percent retracement of its decline since March and April 10 high of 81.87.

Latest Dollar Index Rate

The ICE US Dollar Index, which tracks the US dollar against six major world currencies was trading at 80.505 – 08.17 GMT today, from the session open of 80.536.

US Dollar 2012 Highs

The US Dollar Index touched its highest level since January on Wednesday, after US Treasury bond yields were pushed out of recent ranges and back to levels not seen since October.

“Consistent upside surprises have been an important source of US dollar support.” Sue Trinh, senior currency strategist at Royal Bank of Canada, wrote in a note to clients.

“With the market now pricing in the first Federal Reserve interest rate hike by April 2013, the potential for further US dollar gains on the back of interest rate story seems somewhat limited. However, keep an eye on the US financials, which may serve as another transmission mechanism for US dollar strength.” she added.

Traders and investors will be watching US data later today and Friday for more direction clues with many expecting the US dollar to keep moving higher, which would be a welcome cap for oil prices.

Meanwhile, gold futures regained some strength on Thursday after a drop in the previous session attracted bargain hunters, but a stronger US dollar and fading expectations of more monetary easing in the United States made the metal vulnerable to more selling.

Latest Dollar Index Rate

The ICE US Dollar Index, which tracks the US dollar against six major world currencies was trading at 80.005 – 14.20 GMT today, from the session open of 80.040.

The euro was little changed at $1.3113 as the New York session opened, having earlier dipped to its lowest level since February 16. Stops were cited at $1.3150 with option expiries at $1.3100 likely to sway trade in the near term.

One trader said a close below $1.3080 could prompt some hedge funds to increase short euro positions. Below there further chart support stood around $1.3055, the 50 percent retracement of its January to February rally.

The ICE US Dollar Index rose to 80.132, its highest since January 25, before slipping back slightly.

Greece Debt Restructure

On Friday, Greece took final steps to restructure its debt, using legislation to force remaining private creditors to swap Greek debt for new bonds worth considerably less.

While that paved the way for a fresh bailout for Greece, there was little sign of relief in Spanish and Italian debt markets, where sovereign bond yields rose. All these worries are likely to see the euro ease towards $1.30 and even lower in coming weeks.

Latest Dollar Index Rate

The ICE US Dollar Index, which tracks the US dollar against six major world currencies was trading at 79.775 – 19.57 GMT today, from the session open of 79.926. Technically a slight trading loss for today, however the US dollar made a 0.4 percent gain against the yen and short term direction for the Dollar Index is firmly in the hands of the Greeks.

Greek Default Worries

Concerns over Thursday’s expected announcement on the Greek bond swap eased slightly on Wednesday as Greek pension funds and major banks stated that they will take part in Greece’s bond swap offer to private creditors.

The US dollar has been holding firm against the euro as this situation comes to a head. European stock markets managed modest gains, following Tuesday’s sharp sell off. Oil prices gained once again today, mainly on Iran tensions.

But after months of tortuous negotiations and repeated setbacks, senior bankers and officials remained cautious ahead of the Greek bond swap deadline.

“About the private sector deal – I don’t have a crystal ball. I cannot predict this with certainty.” Dutch Finance Minister Jan Kees de Jager told parliament.

Only 177 billion euros of the debt is covered by Greek law and it was not immediately clear how much of the debt covered by Wednesday’s commitment was under Greek law and how much under international law. Latest estimates are that 120 billion euros of Greek bonds have been swapped, or agreed.

US Dollar and Oil Prices

On Tuesday, the US Dollar Index rose 0.6 percent on nervousness over the Greek debt restructuring, and US WTI oil futures for April 2012 delivery dropped 1.9 percent, to $104.70 a barrel on the NYMEX.

However US Light crude oil bounced back on Wednesday, as hopes that Greece’s debt restructuring will go through, creating better bargains for oil buyers and fanning interest in riskier trades. US WTI is currently around $106.49 a barrel – 20.34 GMT, or 1.6 percent higher on the day.

Some investors say the significance of the tie between oil and the US dollar was becoming exaggerated, but the unusual gains in both the US dollar and oil prices over the last few days continues as more people piled in to a higher price for both. However some traders do not agree.

“It was only a matter of time until it began to break down. It’s getting back to reality now.” said Mark Vonderheide, managing partner of Geneva Energy Markets, noting the factors that drive oil prices are too complex to be distilled into an exchange rate alone.

Latest Dollar Index Rate

The ICE US Dollar Index, which tracks the US dollar against six major world currencies was trading at 78.975 13.50 GMT today, from the session open of 78.794.

In a testimony before the congress on Wednesday, Bernanke said although the economy is on the mend, conditions have not improved enough for the Fed to scale back support measures.

Bernanke had expressed concerns about the American job market, while indicating the sluggish housing market market as a drag on overall economic activity.

He was still pretty glum on the US economy. He said that the fundamentals behind consumer spending were weak, access to credit remained poor, and that inflation wasn’t likely to be a problem, even with rising oil prices.

Dollar to Keep Rising?

But for now at least, there are several good reasons to hang on to the US dollar. With Europe, Britain and Japan all printing, and the US showing signs of hanging back, the US currency is all the more likely to keep rising.

“Ultimately, the key is how much recovery the US and the euro zone each can achieve. Behind profit taking in the euro overnight are concerns over the outlook of the euro zone.” said Michiyoshi Kato, senior vice president of forex sales at Mizuho Corporate Bank.