Worries about Europe’s weakest economies may be starting to weigh heavily on the euro. On Tuesday, Europe’s common currency slipped 0.7% to $1.4551 against the U.S. dollar from $1.4655 late in New York yesterday. Just a few weeks ago, when investors were less intensely focused on the finances of countries like Greece and Ireland, one euro bought $1.5144.
Of course, much of the euro’s recent weakness is the fault of the U.S. dollar. As the year winds down, the picture of the U.S. economy is improving, and that’s boosting the dollar, since traders are now expecting the U.S. Federal Reserve to restore normal interest rates faster than previously thought. Higher interest rates make a currency more appealing to investors by boosting returns.
Some investors are getting ready for a potential shift higher in the dollar — one that could hurt the euro — so it makes sense that bets would be placed today in preparation for the U.S. Fed’s latest interest-rate decision, which is tomorrow.
But the buck’s strength doesn’t tell the whole story. The euro is also suffering against the U.K. pound on Tuesday, dropping 0.5% to 89.41 pence. Last week, Europe’s single currency fell broadly against both the pound and the Japanese yen, as concerns mounted over Greece and other European economies’ ability to fix their public finances. Against the dollar, the euro fell last week from $1.4850 to $1.4615.
“News in Europe is starting to hurt the euro into year end,” says Geoffrey Kendrick, a currency analyst at Swiss bank UBS AG in London.
Mr. Kendrick points to recent worries about Greece, Spain, Portugal and Ireland — which are all dealing with heavy debt burdens — along with lingering doubts about the health of Europe’s banking sector.
Analysts at Italian bank UniCredit are also worried. “The near-term outlook is still very fragile, with more bad news that may prompt further downside potential, even below the $1.45 threshold,” they wrote in a note Tuesday.
And while fears of a debt crisis in Dubai may be dying down, concerns about Greece’s ability to repair its finances continue to haunt the market.
Last night, Greece’s prime minister, George Papandreou pledged – again – to cut his country’s budget deficit radically over the next four years, to the European Union’s required 3%-of-economic-output limit.
Right now, Greece’s deficit is at 12.7%. And Fitch Ratings last week cut Greece’s credit rating to BBB+. Investors are now watching for more downgrades. The fear: If Greece suffers more rating whacks, its banks may have trouble using Greek government bonds as collateral when borrowing from the European Central Bank. That would exacerbate Greece’s fiscal problems.
So far, the market doesn’t seem impressed by Greece’s efforts. “It does not appear that Greek Prime Minister Papandreou has provided much insight into how he will reduce Greece’s heavy debt burden,” said Marc Chandler, an analyst at Brown Brothers Harriman, in a note late on Monday. “It is important that Greece stops the bleeding post-haste.”
Markets, meanwhile, are charging even more for insurance against Greek bond defaults.
On Tuesday, the annual cost to insure $10 million of Greek government debt against default for five years rose again to $228,000 from $220,100 late in New York on Monday, according to CMA DataVision.
