Euro sinks to nine-year low against dollar

Five Euro Note

The euro sank to a nine-year low against the dollar on Monday as the beleagured eurozone, dogged by fears of deflation and a Greek exit from the currency bloc, was throw into sharp contrast with a soaring US economy.

In a busy day of trading the single currency dipped below $1.19 to a level not seen since December 2005, before recovering slightly.

The fall followed reports in Germany that the conservative-led coalition in Berlin would take a hard line if a new Greek government demanded a cut in its debt mountain and sought relief from years of austerity. German ministers were reported as saying they were sanguine about a possible vote in Athens to leave the eurozone once these “impossible” demands were rebuffed.

Though the comments were later denied by a spokesman for Angela Merkel, they triggered a response from Brussels, which took a softer line on possible concessions to Greece while stating membership of the eurozone was “irrevocable”.

Traders are weighing up the prospect that the anti-austerity Syriza party could win this month’s Greek election, raising doubts about the country’s commitment to the terms of its international bailout and its position within the euro bloc.

Syriza’s leader, Alexis Tsipras, has made a number of campaign promises in recent months, costing around £9bn more than is allowed under a deal with Brussels and Greece’s other main lender, the International Monetary Fund.

The 19-member currency zone has also come under pressure following predictions that the European Central Bank is poised to print billions of euros as part of a full-blown quantitative easing programme. Designed to stimulate the region’s moribund economy, QE is expected to make long-term interest rates lower, driving down the value of the euro.

The ECB president, Mario Draghi, will come under pressure to begin QE within the next couple of months following data from Germany showing inflation fell in five of its largest regions last month. Analysts said the eurozone’s largest economy could suffer a prolonged period of deflation, discouraging consumer spending and depressing wage rises.

Funds have flowed out of the eurozone to the US to avoid the prospect of worsening instability and also to benefit from the booming US economy.

Currency dealers have poured money into US assets, driving the dollar to a near decade-high against the euro.

A statement by the US central bank overnight was expected to hint strongly that the economy’s robust growth rate over recent quarters of 4% or more will bring forward the first interest rate rise since the 2008 crash.

Sterling also benefited from the flight of eurozone funds to trade near to six-year highs against the euro reached last week. The pound climbed to more than €1.28. It had passed €1.29 on Friday to reach its highest level since October 2008 before being weighed down by disappointing UK manufacturing and mortgage approval data.

The French president, François Hollande, joined the European Commission in taking a softer line with Athens, saying the Greeks were “free to decide their government” in the election, and that “as for Greece remaining in the eurozone it’s up to Greece alone to decide”.

He said Greece and Spain had “paid a heavy price” to keep the European currency, and that there had been a “radical” reaction from fringe parties. But he played down the danger of electing Syriza and the radical Podemos party in Spain, saying that they could not be compared to the risks from the extreme right.

If the radicals were elected in either country, he added, they would have to stick to the commitments of previous governments, in particular regarding the management of debt.

EU spokeswoman Annika Breidthardt said that if the Greek elections call for a need to reconsider the conditions of Athens’ membership within the eurozone, “we will deal with that once the Greek voters have cast their verdict”.

At the same time, she insisted that a full exit by Greece was not on the cards as the euro rules say “membership is irrevocable”.

In Berlin government spokesman Steffen Seibert said: “Since the beginning it has been the policy of the government to strengthen the eurozone including Greece. This has not changed.”

Powered by Guardian.co.ukThis article was written by Phillip Inman in London and Anne Penketh in Paris, for The Guardian on Monday 5th January 2015 19.09 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010

 

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