Euro Facing Largest Decline Since Early Last Year

Due to fears of the spread of the debt crisis and weakening economies in the eurozone, last week the euro once again came under pressure in global currency markets, and it could record the largest monthly decline since January of last year in May.

Last week, the euro exchange rate against the dollar plummeted by 2.38 percent to 1.2271 dollars, coming close again to the lowest level in four years of 1.2143 dollars, which it fell to a week earlier. Against the Japanese currency, the price of the euro fell by 1.29 percent to 111.74 yen. The American currency, on the other hand, strengthened against the Japanese by 1.12 percent, reaching an exchange rate of 91.04 yen. The dollar index, which shows the value of the dollar against six major world currencies, strengthened last week by 1.93 percent to 86.75 points.

From the very beginning of last week, the euro was under pressure as the Spanish central bank took over management of the savings bank CajaSur, after attempts to merge it with another regional bank failed. Although CajaSur is a relatively small bank, analysts point out that such a decision by the central bank further highlighted the weaknesses of the European banking sector and raised fears that more banks might require rescue from eurozone governments. “Fears related to the Spanish banking sector certainly amplify the danger of new similar cases,” assesses Lee Hardman, an analyst at Bank of Tokyo-Mitsubishi UFJ. The European currency was further shaken on Wednesday by a Financial Times article stating that China is considering selling part of its euro bonds from its foreign exchange reserves due to fears of a deepening debt crisis in the eurozone. As a result, the euro exchange rate against the dollar once again dipped below the level of 1.2200 dollars, finding itself close to the lowest level in four years of 1.2143 dollars.

Against the yen, it fell to 108.88 yen, the lowest level since December 2001. However, later the European currency recovered as Chinese government officials denied the report, emphasizing that China remains committed to its long-standing goal of diversifying its foreign exchange reserves. China will continue to follow the principle of investment diversification with its foreign exchange reserves, and Europe will remain one of the key markets for Chinese investments, stated the central Chinese bank. However, the dust around Chinese reserves had not yet settled, and a new storm in the market was triggered on Friday by Fitch, which downgraded Spain’s credit rating, believing that austerity measures would further weaken an already fragile Spanish economy. Due to all this, since the beginning of the month, the euro has weakened by 7.7 percent against the dollar, and in May the European currency could record the largest monthly decline since January of last year. This will also mark the sixth consecutive month of euro weakness. (H)