The euro fell to an 18-month low against the dollar this week as the euphoria evaporated over a €750bn rescue package to shore up the eurozone’s sovereign debt markets.
After a surge following the announcement of the package to a high of $1.3093 on Monday, the euro declined steadily against the dollar, on Friday hitting an intraday low of $1.2359, its weakest level since November 2008. It is within reach of testing the $1.2328 level, which would represent a four-year low.
The euro suffered as investors believed growth in the eurozone was likely to suffer when governments such as Greece, Portugal and Spain rein in spending to address budget deficits.
“European growth will stall and fall precipitously as higher taxes, public spending cuts and higher unemployment will see civil unrest and companies will cease to look at expansion as higher taxation restricts profitability,” said Maurice Pomery, of Strategic Alpha. “The euro still has some way to fall.”
The single currency was also undermined as the measures suggested that the European Central Bank was likely to keep interest rates lower for longer than other large central banks.
There were also concerns that the ECB had in effect entered into a policy of quantitative easing by announcing that it had started to purchase eurozone government bonds to try to prop up the region’s sovereign debt market.
Jean-Claude Trichet, ECB president, has insisted that its bond purchases would be sterilised. This means that the central bank would withdraw the liquidity it pumps into the financial system – for instance by issuing short-term bills – and thus not increase the money supply.
But analysts were unsure that the ECB would be able to honour its pledge.
“Mr Trichet argued that the bond operations will not be allowed to compromise the ECB’s fight against inflation but we suspect that the market is sceptical – which could keep pressure on the euro,” said Steve Barrow, of Standard Bank.
During the week, the euro dropped 2.9 per cent to $1.2390 against the dollar, fell 2.5 per cent to Y113.84 against the yen and hit a record low of SFr1.4000 against the Swiss franc.
The euro was 1 per cent weaker at £0.8525 against the pound on the week. But sterling lost ground elsewhere as concerns grew over the UK’s fiscal deficit.
Over the week, the pound fell 1.8 per cent to $1.4530 against the dollar, within touching distance of the 14-month low of $1.4475 that it hit this month and dropped 1.5 per cent to Y133.54 against the yen.
The pound suffered after the Bank of England struck a dovish tone in its quarterly inflation report, refusing to rule out further quantitative easing.
It failed to rally significantly on news that the UK’s Conservative party had formed a coalition with the Liberal Democrat party. “[There are] fears that Conservative fiscal tightening plans are being watered down to accommodate Lib Dem policy demands,” said Hans Redeker, of BNP Paribas.
“We continue to view any rebounds in sterling against the dollar as selling opportunities.”
The dollar rose 0.4 per cent to Y91.90 against the yen over the week but suffered against commodity-linked currencies, falling 0.3 per cent to $0.8906 against the Australian dollar.
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