May 1, 2010 3:00 am

Euro rises after week of turmoil

The euro dropped to a one-year low against the dollar this week as worries over the fiscal problems in heavily indebted Greece and other countries on the periphery of the eurozone escalated.

The single currency was under pressure early in the week as fears mounted that a joint rescue package for Greece from its eurozone partners and the International Monetary Fund would not be large enough, or come soon enough, to shore up its finances.

But the euro plunged on Tuesday after rating agency Standard & Poor's slashed Greek government debt to junk and downgraded Portugal. The euro was hit by another wave of selling on Wednesday after S&P cut Spain's rating. The single currency dropped to a 12-month low of $1.3112 against the dollar as the yields on Greek, Portuguese and Spanish government debt surged to record levels.

The euro recovered some poise later in the week on reports that a rescue package for Greece had been agreed between its leaders andrepresentativesfrom the European Union and the IMF and was to be unveiled in the next few days.

Reports suggested that Athens had agreed to target a €24bn ($32bn) reduction in its budget deficit over three years. In exchange, Athens would receive funding of €100bn-€120bn, from the IMF and Greece's eurozone partners.

The euro recovered to stand down 0.3 per cent at $1.3307 against the dollar on the week. The single currency also recovered from a three-month low against the pound to stand 0.2 per cent higher at £0.8711 against the pound on the week and eased 0.3 per cent to Y125.15 against the yen.

Not all analysts were convinced that the euro's rebound was sustainable. Neil Mellor at Bank of New York Mellon said that the reaction of the Greek public to austerity measures agreed by its government had received little attention in the market. He said opinion polls showed a majority of the Greek publicdisapproved that the IMF and the EU had been asked for aid in the first place, and two thirds thought the current situation could lead to social unrest.

"We suspect the reaction to new measures when they are announced will be negative," said Mr Mellor. "This story may not yet have run its course. We still see this as a continuing negative for the euro."

Meanwhile, the dollar and the yen benefited at the start of the week as worries over Greece spilled over into the wider market, sending global equities sharply lower and driving haven demand for the US and Japanese currencies.

But investor confidence rebounded on hopes of a Greek rescue package, combined with strong corporate earnings and a pledge from the Federal Reserve to keep US interest rates at ultra-low levels for an extended period. This saw the dollar and yen give back some of their gains.

Over the week, the dollar rose 0.7 per cent to $1.5273 against the pound and climbed 0.2 per cent to SFr1.0771 against the Swiss franc. The dollar was little changed at Y93.99 against the yen on the week.

The Australian dollar rose 0.5 per cent to $0.9300 against the US dollar over the week after stronger than expected consumer price inflation data boosted expectations that the Reserve Bank of Australia would raise interest rates further at its policy meeting this month.

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