Dollar Strengthens Sharply, Euro Falls

After several weeks of decline, the dollar significantly strengthened last week in the currency markets, particularly against the euro, which is under pressure due to financial problems in Ireland and several other eurozone members.

The dollar index, which shows the value of the U.S. dollar against six major world currencies, jumped 2.50 percent last week to 78.43 points. Meanwhile, the U.S. currency strengthened 2.43 percent against the euro, causing the euro exchange rate to plummet to 1.3690 dollars. In relation to the Japanese currency, the dollar price rose 1.56 percent to 82.51 yen. However, the euro weakened against the Japanese currency by 0.97 percent, bringing its exchange rate down to 112.95 yen.

Just about 10 days ago, when the U.S. central bank further loosened monetary policy, the dollar index had plunged to just 75.63 points, the lowest level in 11 months, while the euro price reached its highest level in 10 months at 1.4283 dollars. However, the situation changed abruptly last week. After doubts regarding the quantitative easing of U.S. monetary policy were resolved, market attention shifted back to the debt problems of the eurozone.

"The issue of the Fed’s quantitative easing has finally been taken off the agenda, and the market is refocusing on other factors. Tensions have significantly increased again due to the increasingly unsustainable financing costs of Ireland and Portugal in the market," says Lee Hardman, currency strategist at Bank of Tokyo-Mitsubishi UFJ.

Investors are particularly concerned about Ireland’s financial problems, which could force this eurozone member to seek assistance, as Greece did in the spring. Ireland’s budgetary issues have caused a sharp increase in its borrowing costs in the markets, with yields on 10-year Irish government bonds soaring to 8.9 percent, the highest level in eurozone history. Meanwhile, the yield spread between Irish and benchmark German government bonds reached a record 6.5 percentage points.

As a result, the euro exchange rate at one point plunged to just 1.3575 dollars, the lowest level in six weeks. However, it recovered on Friday as officials from France, Germany, Italy, Spain, and Britain stepped in, announcing a joint statement at the G20 summit in Seoul, emphasizing that bondholders, under existing regulations, would not be forced to bear a larger share of the burden of any future crises.

Additionally, European Commission President Jose Manuel Barroso stated that the European Union is ready to assist Ireland if necessary."Comments from EU leaders provided some support for the euro," assesses ING currency strategist Chris Turner. Last week, the focus for investors was also the meeting of G20 leaders of the world’s largest economies in Seoul. However, the conclusions of that meeting are only moderately positive. It was generally agreed to reduce tensions that threaten to erupt into a currency war and strengthen protectionism, but there are no more concrete agreements.