Euro Under Attack from Crisis

The euro weakened significantly against the yen and the dollar on Monday in international currency markets, pressured by heightened concerns about the state of the European financial sector in the absence of a coordinated political response, while investor risk aversion boosted the yen’s strength.

The euro fell 1.3 percent against the dollar, to 1.3583 dollars, after previously sliding to its lowest level against the U.S. currency since August 2007 at 1.3542 dollars. Against the yen, it weakened 3.5 percent, to 139.82 yen, the lowest level in 2.5 years. The dollar also recorded a significant decline in value against the Japanese currency, plunging two percent to 103.10 yen. Sentiment towards the euro further deteriorated after leaders of the four largest European economies rejected a proposal over the weekend to compile a coordinated plan to rescue the financial sector.

European banks have been severely affected by the consequences of the crisis that originated in the U.S. with the collapse of the real estate market and the surge of non-performing mortgage loans. After bank sector stocks dragged European stock indices down by a full five percent in one day, Sweden on Monday joined a number of countries that announced steps to halt the deepening crisis. The Swedish government announced an increase in the limit for insuring bank deposits, and the central bank raised the volume of loans offered to banks.

The day before, Germany also took similar action, announcing guarantees for citizens’ savings accounts, prompting similar initiatives from Austria and Denmark. The first such guarantee was announced last week by Ireland, provoking sharp criticism within the EU. “Foreign investors liked investing in the eurozone until the end of last year. A non-coordinated political response gives less reason to invest in the eurozone, and this encourages such fluctuations,” assesses the market situation Chris Turner, head of currency strategy at ING Bank in London. The situation in Europe contrasts with that in the U.S., where a government plan to rescue the banking sector worth 700 billion dollars was finally adopted on Friday. The dollar is also benefiting from a strong increase in demand for the U.S. currency, due to the continued freeze of global money markets. (H)