The euro exchange rate plummeted on Tuesday in global foreign exchange markets to its lowest level against the dollar in the last six weeks and against the yen in the last four months following reports in the Spanish press that Banco Santander is exposed to high-risk American mortgage loans amounting to 2.2 billion euros.
By noon, the euro weakened by 0.3 percent against the dollar, trading at 1.3571 dollars. During trading, it fell to as low as 1.3564 dollars, the lowest level in the last six weeks. The European currency also weakened by the same amount against the yen, to 160.34 yen, after touching 159.9 yen, the lowest level in the last four months. The Spanish daily ABC reported that Santander is exposed to the risky American credit sector. This has pressured the euro exchange rate and raised questions among investors about how exposed European banks really are to problems in the American credit markets.
“Problems in the credit market have unsettled global capital markets, and the market is now looking for the next bad news, prompting investors to flee from risky positions,” said Geoff Kendrick, currency strategist at Westpac. The European Central Bank, on the other hand, announced on Tuesday a new tender, the fourth in a row, to provide money markets with sufficient liquidity and alleviate investor concerns about maintaining liquidity in the banking system. However, such ECB actions prompt investors to reconsider the chances that the Bank will raise interest rates again in September from the current 4.0 to 4.25 percent.
