The euro fell to its weakest level in eight months against the dollar on Thursday, after Luxembourg’s prime minister said the single currency was “overvalued” in spite of its recent decline.
The euro has fallen more than 10 per cent since hitting a record high of $1.6038 against the dollar on July 15.
Jean-Claude Juncker, who also chairs the “eurogroup” meetings of eurozone finance ministers, welcomed the fall, saying it better reflected economic fundamentals.
“But I still think the euro is overvalued, not only against the dollar but against all other currencies,” he said.
The euro was also hit as the European Central Bank – which, as expected, kept interest rates on hold at 4.25 per cent after its monetary policy meeting – announced plans to clamp down on abuse of its financial market liquidity-supporting operations. This raised fresh fears over the funding of the region’s financial sector, sending banking stocks lower.
Late in New York, the euro was down 1.2 per cent to $1.4323 against the dollar, its weakest level since January.
It had also lost 2.3 per cent to Y153.40 against the yen and dropped 0.7 per cent to £0.8110 against the pound.
Meanwhile, fears over the UK financial sector sent the pound into reverse.
Sterling had advanced against the dollar after the Bank of England kept interest rates unchanged at 5 per cent after its monetary policy committee meeting earlier in Thursday’s session.
However, sterling dropped sharply as the market digested the implications of the ECB’s plans for UK banks.
The pound fell to a low of $1.7628 against the dollar, its weakest level since April 2006, before rallying to stand down 0.5 per cent at $1.7681.
Meanwhile, a better-than-expected survey of the US services sector from the Institute for Supply Management gave the dollar a boost.
The dollar rose 0.3 per cent to SFr1.1090 against the Swiss franc, 0.4 per cent to C$1.0648 against the Canadian dollar and climbed 0.7 per cent to $0.8295 against the Australian dollar.
The dollar lost ground against the yen, however, dropping 1.1 per cent to Y107.10 as falling equities increased the safe-haven appeal of the low-yielding Japanese currency.
Elsewhere, the Swedish krona failed to gain traction after the country’s central bank raised interest rates by 25 basis points to 4.75 per cent. Analysts said the currency suffered as the Sveriges Riksbank indicated that it had reached the end of its monetary policy tightening cycle.
Ben May, at Capital Economics, said the decision to raise interest rates clearly showed that the central bank remained concerned about the emergence of second-round inflation effects.
“But while the Bank did signal that the current economic slowdown should ensure that interest rates have peaked, we still expect the Bank to cut rates more aggressively than its own forecast suggests next year,” he said.
The Swedish krona eased 0.8 per cent to SKr6.5930 against the dollar and edged 0.1 per cent higher to SKr9.4650 against the euro.