Financial Problems of Greece Pressured the Euro

Concerns about the potential consequences of the Greek debt crisis on the eurozone economy pressured the euro exchange rate on international currency markets last week, while the Japanese yen strengthened against both the euro and the dollar due to reduced investor risk appetite.

Last week, the dollar index, which shows the value of the US dollar against six major world currencies, fell by 0.44 percent to 77.11 points. Meanwhile, against the Japanese currency, the dollar exchange rate plummeted by 2.10 percent to 90.73 yen. Against the European currency, the dollar strengthened by 0.23 percent, bringing the euro price down to 1.4383 dollars. The European currency also weakened against the Japanese yen by 2.23 percent, causing the euro price to drop to 130.55 yen.

The euro came under strong pressure due to investor concerns regarding the Greek debt crisis and its potential consequences for the eurozone economy. Greece presented a plan on Thursday to exit the crisis and stabilize its budget, as well as to restore the credibility of managing its struggling economy.

"In the near future, it will be crucial for the relationship between the euro and the dollar whether EU member states or international institutions are willing to seriously consider a rescue package for Greece. Such a move would represent a point of no return, as it would at least contradict the fundamental tenets of the Stability and Growth Pact, and there would be a risk of a moral collapse of European fiscal policy," says Commerzbank analyst Antje Praefcke.

The euro was also pressured because the leaders of the European Central Bank decided at their regular meeting on Thursday to maintain the key interest rate at the current record low level of 1.0 percent. ECB Governor Jean-Claude Trichet stated that key interest rates would not rise anytime soon due to the uneven and slow recovery of eurozone member states. Regarding Greece, he ruled out the possibility of special assistance to resolve the country’s debt crisis.

The decline in stock prices on global exchanges, as well as signs of tightening monetary policy in China, drove investors away from riskier investments, which led to the strengthening of the yen, considered a safe haven for capital in uncertain times.

Last week, China was also in the focus of investors as its central bank raised the level of minimum reserves for banks for the first time in over a year to prevent overheating of the economy after a wave of massive fiscal stimulus. "China has so far been the key that helps the rest of the region emerge from last year’s recession, and a sudden change in the level of Chinese demand could erase part of that support," analysts at Calyon noted in a letter to clients. Analysts expect further gradual tightening of Chinese monetary policy to curb the risks of excessive liquidity and market bubbles. (H)