Euro falls to 9-year low amid Greece woes

The euro sank briefly to a nine-year low against the dollar on Monday, as investors’ nerves frayed over the political turmoil in Greece and expectations rose that the European Central Bank will defy German scepticism and start buying government bonds.

The dollar strengthened against all major currencies except the Japanese yen, taking the dollar index to its highest in nine years in intraday trading. The euro was among the biggest movers, falling as much as 1.2 per cent against the dollar to $1.1864 — its weakest level since March 2006 — before narrowing the decline to $1.1924, a four-and-a-half-year low by mid-afternoon.

The euro’s move was followed by data from Germany showing that inflation in the eurozone’s largest economy had fallen to the lowest level in more than five years in December, raising the chances of an outright decline in prices in the 19-member currency bloc when the data are published on Wednesday.

The euro was little changed following the data, but it provided further ammunition for European Central Bank president Mario Draghi to begin a government bond-buying programme that Germany’s Bundesbank is reluctant to implement.

The slump in oil prices helped drag consumer inflation in the eurozone’s most powerful economy down to 0.1 per cent in the year to December, down from 0.5 per cent in November, according to preliminary data published by Germany’s official statistics office on Monday. The last time price rises were slower was October 2009.

While the latest drop in prices across the region is down to the falling cost of crude — a factor central bankers usually ignore — a poor inflation figure for the eurozone would raise the chances of action by the ECB.

The stronger US currency on Monday also nudged oil prices to multiyear lows, with WTI crude dropping 1.3 per cent to $52 a barrel while Brent crude fell 0.7 per cent to $55.74 by mid-morning London time.

“We are still in a strong-dollar environment going into this year, but the euro downtrend is leading the way,” said Mitul Kotecha, currency strategist at Barclays.

After dropping to a four-and-a-half-year low at the end of last week, the euro’s fall intensified on Monday after a weekend article in Der Spiegel, citing unnamed sources, that said Berlin was ready for Greece to exit the eurozone if the populist Syriza party won this month’s snap election and reneged on the country’s reform programme.

Chancellor Angela Merkel’s government insisted Germany still assumes “that Greece will continue to meet its obligations”.

Kit Juckes, economist at Société Générale, said: “If you’re a politician outside Athens you’ve got to sound tough. But the European project needs strengthening, not undermining.”

The common currency had already fallen 0.8 per cent on Friday after Mr Draghi warned the risk of the central bank failing to meet its price stability mandate was “higher than it was six months ago”. Investors took the comments as a strong hint that the ECB would unveil a quantitative easing package on January 22.

Another catalyst for further euro weakness could come on Wednesday, when economists expect Eurostat’s “flash” reading for December consumer prices across the eurozone will give the first negative print since late 2009. Economists forecast a reading of minus 0.1 per cent year-on-year, after a five-year low of 0.3 per cent the month before.

Mr Draghi said on Friday that deflationary risks “cannot be ruled out completely” but insisted they were limited. “If inflation remains low for a long time, people might expect prices to fall even further and postpone their spending. We are not there yet. But we need to tackle this risk,” he told Handelsblatt.

Also on Wednesday, minutes from the US Federal Reserve Board’s December meeting are expected to highlight the contrasting trajectories of the two major central banks. The minutes are likely to give a better sense of when US policy makers anticipate raising benchmark interest rates.

“Ultimately what will send euro-dollar down is diverging interest rates,” said Mr Juckes. “If the political uncertainty in Athens isn’t reflected in bond and equity markets outside Greece, I don’t think the euro will fall to $1.15 in a straight line.”