Bundesbank Warnings Weaken Euro

In the currency markets, the euro exchange rate fell last week as investors were concerned about forecasts for the eurozone economy, which indicate a deeper recession than previously thought.

The euro exchange rate against the US dollar weakened by 0.5 percent last week, to 1.2925 dollars, and it also fell by the same amount against the Japanese currency, diving to 106.60 yen. The dollar price against the Japanese currency remained unchanged on a weekly basis, at 82.45 yen.

By mid-week, the euro strengthened as investors were encouraged by the plan to buy Greek debt on more favorable terms than expected, boosting optimism that the country would continue to receive assistance from international lenders and avoid bankruptcy.

Thanks to this, the euro exchange rate on Wednesday broke above the level of 1.31 dollars for the first time in a month and a half. However, in the second half of the week, a series of weak economic news from the eurozone put pressure on the euro, causing it to drop below 1.30 dollars.

First, on Thursday, the European Central Bank cut its growth forecasts for the eurozone economy for the next year to a range of minus 0.9 to plus 0.3 percent. According to previous estimates for 2013, growth forecasts ranged from minus 0.4 to plus 1.4 percent. The German central bank, Bundesbank, reduced its growth estimate for the largest European economy next year from 1.6 to just 0.4 percent.

At the same time, Bundesbank warned of the risk of recession in the German economy as the debt crisis in the eurozone, which has dragged on for three years, takes its toll. At the regular monthly meeting, ECB leaders left the key interest rate unchanged at a record low of 0.75 percent. However, statements from ECB President Mario Draghi hinted that serious consideration is being given to lowering interest rates to stimulate the eurozone’s exit from recession.

“Discussions about interest rates are the reason for the euro’s downward trajectory in recent days, and the Bundesbank report further intensified the pressures,” said Neil Mellor, currency strategist at Bank of New York Mellon.

On the other hand, the US dollar was positively influenced on Friday by better-than-expected data showing that in November, the number of employed in the US increased by 146,000, while the unemployment rate fell from 7.9 to 7.7 percent.

“This is quite a good number. The dollar is now gaining value, and this should continue. However, the question arises whether this data will change the stance of the US central bank, the Fed, regarding new stimulus. The necessity for stimulus remains unquestionable, but the Fed may opt for smaller programs,” said Kathy Lien, director at BK Asset Management.