Debt Crisis Pushes Euro Below $1.30

Fears of a deepening debt crisis in the eurozone are once again pressuring the euro, causing its exchange rate against the dollar to plummet last week to the lowest level in nearly four months, well below $1.30.

The euro’s exchange rate against the US dollar fell by 3.3 percent last week, marking its largest weekly decline since August of last year. It sank to $1.2910, the lowest level since mid-September.  In relation to the Japanese currency, the price of the euro fell by 1.2 percent to 107.30 yen. The dollar strengthened by 2.2 percent against the Japanese currency, reaching an exchange rate of 83.10 yen. The dollar index, which shows the value of the US dollar against six major world currencies, rose by 2 percent last week to 81.02 points. At one point, it reached 81.09 points, the highest level since early December.

The rise of the dollar is attributed to macroeconomic data indicating that the US economy is strengthening. Industrial production continues to grow, as does American consumer spending, and the US labor market is slowly but surely recovering. “This fuels expectations of self-sustaining growth, supports interest rates, and largely bolsters the dollar,” says Bon Sinche, an analyst at RBS Global Banking and Markets.

On the other hand, the euro is under pressure from the announcement of new bond issuances by several eurozone members. It is estimated that next week Germany, the Netherlands, Italy, Spain, and Portugal will issue new bonds worth between 20 and 22 billion euros in the primary market.

“The bond issuances next week in Spain, Portugal, and Italy will be a good test of investor sentiment. The fear of excessive bond supply in the short term supports the rise in prices of German bonds at the expense of bonds from peripheral members,” says Nick Stamenkovich, a strategist at Ria Capital Management.

There is significant concern about how the bonds of Portugal and Spain will be received in the market, as they may be forced to follow in the footsteps of Greece and Ireland and seek financial assistance from the EU. As a result, yields on the securities of these eurozone members are rising. On Friday, the spread between the yields on 10-year Portuguese bonds and their corresponding German bonds increased by 13 basis points to 433 points, while the spread between Spanish and German bonds rose by 6 basis points to 264 points.

Portugal will offer new bonds in the market on Wednesday, and Spain on Thursday. The level of demand and yields on the bonds of these countries could influence the direction of the euro. Rising borrowing costs would further pressure the already weakened economies of these two eurozone members.