Euro Under Pressure from Debt Crisis, China Offers Assistance

Last week, the euro was under pressure in the currency markets due to the debt crisis in the eurozone, and its exchange rate stabilized only after China offered assistance. The euro’s exchange rate against the US dollar weakened by 0.47 percent last week, to 1.3120 dollars.

In relation to the Japanese currency, the price of the euro plummeted by 1.80 percent, to 108.75 yen. The dollar also weakened against the Japanese currency, with its exchange rate falling by 1.20 percent, to 82.90 yen. The single European currency weakened at the beginning of the week under pressure from investor concerns about certain eurozone members, especially after Moody’s warned that it might downgrade Portugal’s rating by two levels due to weak economic forecasts and high borrowing costs. Fitch Ratings, on the other hand, warned that it might soon downgrade Greece’s rating after reviewing the state of its public finances.

"Earlier optimism in the currency markets somewhat faded after Moody’s announcement, but none of this came as a surprise," comments currency analyst Jane Foley from Rabobank. Many market players believe that pressures on the euro will continue due to fears of the debt crisis spreading, which has already trapped Greece and Ireland, to Portugal and Spain. As a result, the euro’s exchange rate at one point plunged to 1.3055 dollars, the lowest level in three weeks. The euro’s exchange rate stabilized only in the second half of the week after China indicated that it was ready to assist eurozone countries in recovery.

The Chinese Ministry of Foreign Affairs stated that the Asian giant is ready to help the eurozone rebuild its economic foundations and participate in the International Monetary Fund’s aid package for the region by purchasing four to five billion euros worth of Portuguese government bonds to alleviate pressure on that eurozone member. This eased pressure on the euro, but analysts still warn that forecasts for the euro remain uncertain, and they expect further weakening at the beginning of 2011 due to the debt crisis.

"To achieve a visible result, China will need to invest significantly more than five billion euros if it wants to influence the change in negative sentiment towards Europe," assesses currency analyst Michael Hewson from CMC Markets. Such sentiment has prompted investors to withdraw from positions in euros and, in search of a safe haven for capital, turn to the Swiss franc. As a result, on Tuesday, the euro’s exchange rate fell to a new historical low of 1.2440 francs. However, by the end of the week, it recovered, reaching 1.2614 francs."The rise of the Swiss franc is seen as a warning sign that the eurozone faces new difficulties at the beginning of 2011. The appeal of the franc as a safe haven has been heightened by the escalation of concerns related to the eurozone’s debt problems," comments economist Lee Hardman from Bank of Tokyo-Mitsubishi UFJ. (H)