Euro Under Pressure from Budget Problems in the Eurozone

Due to budgetary issues in several eurozone member states, the euro exchange rate against the dollar plummeted last week on global currency markets to its lowest level in nine months, while it sank against the Japanese yen to its lowest since February last year.

Last week, the dollar index, which shows the value of the U.S. dollar against six major world currencies, rose by 1.3 percent to 80.34 points, the highest level since July last year. In this context, the dollar strengthened by 1.4 percent against the European currency, causing the euro price to fall to 1.3677 dollars. At one point, it dropped to just 1.3586 dollars, the lowest level since May last year. The European currency also weakened against the Japanese yen by 2.5 percent to 122.07 yen, having previously fallen to its lowest level in nearly a year – 120.72 yen. In addition to the European currency, the Japanese yen also strengthened against the U.S. dollar, causing the dollar exchange rate to fall by 1.23 percent to 89.23 yen. Investor fears of a debt crisis outbreak in Europe have been the primary reason for the euro’s decline for several weeks.

The euro exchange rate against the dollar has fallen about 10 percent since December last year, when it was worth more than 1.51 dollars. Authorities in Greece, Portugal, and Spain are trying to reduce budget deficits, but given their budgetary commitments and economic weaknesses, they are struggling to do so. The costs of insuring government debts of Greece, Portugal, and Spain reached record levels last week, as investors fear that these countries will have trouble repaying their debts due to excessive public spending. The European Commission approved the Greek government’s plan on Wednesday to reduce the enormous budget deficit to 8.7 percent of GDP this year, which includes freezing public sector wages, raising the retirement age, and increasing gasoline prices.

However, this did not calm investors in the currency markets. “The fact that the European Commission has given the green light to the Greek government’s plan to establish control over public finances is unlikely to fully alleviate market concerns regarding the overall position of the country. Evidence of real progress or more concrete signals from the European Commission that it is ready to support Greece will be needed to completely neutralize the pressure on Greek bonds,” says Ben May, an analyst at Capital Economics. Investors were also eagerly awaiting employment data from the U.S. for January last week, which showed a decline in the unemployment rate to 9.7 percent, the lowest level in the past five months, but also a further drop in the number of employed.

“Although better numbers ease tensions across all markets, they cannot resolve the budgetary problems of Spain, Portugal, and Greece. In an environment of heightened risk aversion and weakness in the stock markets, investors are once again turning to relatively safer havens, the dollar and the yen,” says Jane Foley, an analyst at the online company Forex.com. The weakening of the euro prompted the Swiss central bank to intervene in the markets on Friday to encourage a decline in the value of the Swiss franc against the euro, as the euro exchange rate against the franc sank to its lowest level in 15 months – at 1.4551 francs. “At a time when the recovery is still very fragile, and Europe is burdened by its own problems, the last thing Switzerland needs is a stronger currency,” says Mitul Kotecha, an analyst at Calyon. (H)