Euro continues to weaken

Last week, the euro faced strong pressure in the currency markets as investors are concerned about the debt crisis and increasingly weak forecasts for the eurozone economy.

The exchange rate of the euro against the US dollar fell by 1.1 percent last week, to 1.2710 dollars, and on Friday it briefly dipped to just 1.2688 dollars, the lowest level since early September. In relation to the Japanese currency, the price of the euro plummeted by 2.1 percent, to 101 yen. At one point on Friday, it sank to the lowest level in a month – 100.38 yen.

The dollar also weakened against the Japanese currency by 1.2 percent, causing its exchange rate to slide to 79.50 yen. The pressure on the euro is a result of the new autumn forecasts from the European Commission, which indicate that the eurozone is expected to emerge from recession next year, but with an anemic growth of 0.1 percent. Overall, economic growth in the European Union is expected to be 0.4 percent.

The Commission sharply downgraded its earlier forecasts, which had predicted growth in the eurozone of 1 percent and 1.3 percent in the entire Union for the next year. Concerns about the spread of the economic crisis from over-indebted economies on the periphery of the eurozone to the large, central economies of the 17-member bloc have pressured the euro’s exchange rate.
The German Minister of Economy stated that growth in the largest eurozone economy is likely to slow down in the fourth quarter of this year and in the first three months of next year.
The French central bank estimates that the French economy, the second largest in the eurozone, will fall into recession by the end of this year. The latest weak indicators have fueled speculation that the European Central Bank may ease monetary policy by the end of the year.

At last week’s meeting, ECB leaders decided to keep the key interest rate unchanged at a record low of 0.75 percent, but speculation about a rate cut was supported by ECB President Mario Draghi’s statement that the bank expects the eurozone economy to remain weak in the near future.
– The European economy needs to revive. If the ECB does not do it, who will? The euro will continue to weaken as there are no signs of recovery in Europe, and activity continues to weaken in the rest of the world, said Joseph Trevisani, a strategist at Worldwide Markets.

Investor reluctance towards the euro is also attributed to the expectation of a vote in the Greek parliament on the proposed budget for 2013, scheduled for Sunday. The budget must receive the ‘green light’ from parliament for Athens to receive a new tranche of international aid. Investors are also concerned about the threats of the ‘fiscal cliff’, automatic budget cuts, and the elimination of tax breaks in the US if Congress does not find a better solution by the end of this year.

As the balance of power between Democrats and Republicans in Congress remained unchanged after Barack Obama’s victory in the presidential elections, a trench battle over the budget is expected. As a result, stock prices on global exchanges sharply fell last week, and risk aversion led investors to seek safer havens for capital. Although Washington is facing budget issues, the dollar strengthened against most other major world currencies. However, as the Japanese currency is considered a safe haven in these uncertain times, the yen was the biggest winner last week, significantly strengthening against the dollar.