Euro Slump Continues as Pressure Grows on Italy

The euro slump seems nowhere near an end, as the European currency continued to shed value on Tuesday, as traders remain worried about Italy's ability to resolve its debt problems. At the moment, the euro sunk 1.26% to $1.3853 against the U.S. dollar. The euro's fall was even steeper against the Japanese yen, as the troubled European currency retreated 1.87% to trade around ¥110.56. The euro is suffering heavy losses in recent days as traders become increasingly worried about Italy's ability to service its debt payments. On Monday, the

, following big losses on Friday. Unicredit Spa lost 6.3% on Monday, while Intesa Sanpaolo fell 7.7%. German Chancellor Angela Merkel tried to come to Italy's rescue by expressing her full confidence in the Italian government's ability and willingness to reduce its debt. Merkel's remarks had very little impact, if any, on traders, as

, a new euro-era record. Italy has the second largest public debt to GDP ratio in the Eurozone, right after Greece. Some credit rating agencies also started to worry about Italy's ability to repay its massive debt.

, for instance, has recently warned it might cut Italy's rating. With recent losses in the Italian stock markets and rising bond yields, a reduction of Italy's credit rating seems more likely. The Europeans cannot afford Italy to become new Greece. Italy is the Eurozone's third largest economy and bailing out such a giant would dwarf all the European efforts in Greece, Ireland and Portugal combined. There is already mounting opposition to more bailouts in some countries of the Eurozone center, most notably in Germany and Finland, so it remains to be seen if the Eurozone governments will be able to agree on bailing out Italy. Markets are not very confident that aging and increasingly unpopular Prime Minister Silvio Berlusconi is the right man to pull Italy out of its debt crisis. The billionaire prime minister has plenty of problems on his own, with criminal charges mounting against his. It remains to be seen if Berlusconi will pursue vigorously a judicial reform, in order to shield himself from persecution, or economic reforms, necessary to save Italy from bankruptcy. Today's inflation data adds more doubts to whether the latest ECB's rise in interest rates was the right decision. The ECB was worried about rising inflation in the Eurozone center. The latest data, however, do not show rising inflation to be such a massive problem. According to the Federal Statistics Office,

rose 0.1% in June, the same rate as in May and in line with analysts' expectations. On a yearly basis, inflation in June stood at 2.3%, unchanged from May and only slightly above the 2% target. At the same time,

also rose 0.1% in June, again in line with analysts' expectations. On an annual basis, France's inflation rose from 2% in May to 2.1% in June. Obtaining new loans on open markets became a bit harder for Greece, Spain, Portugal and Italy, following July's ECB meeting and ECB's decision to raise interest rates. The latest inflation data puts a big question mark over the validity of ECB's decision. The Eurozone is entering a crucial time period and the Europeans cannot afford to make mistakes.

Traders who believe that the Europeans will not be able to prevent the Greek crisis spreading to other countries on the Eurozone periphery, which will have devastating effects on the euro, might want to consider the following trades:

Traders who believe that the Europeans are ready to fight until the last dime and eventually will find a way to resolve debt problems in the Eurozone periphery, which should push the value of the euro higher, may consider an alternate positions: