LONDON—Sovereign-debt contagion fears kept the euro on the slide Wednesday, with the single currency falling to a new two-month low of $1.3284 despite German business confidence rising to a new record high.
The euro traded recently at $1.3318 from $1.3370 late Tuesday in New York, and was also down at 110.74 yen from 111.19 yen. The dollar was little changed at 83.16 from 83.17 as the yen benefited from the fading of military tensions on the Korean peninsula. Elsewhere, the pound was also hardly changed at $1.5778 from $1.5782.
Although the euro experienced a small bounce earlier in the day, its recent decline quickly resumed after ratings agency Standard & Poor's downgraded both short- and long-term Irish sovereign debt.
Fears that Ireland could yet seek a debt restructuring rose after the latest opinion poll showed that even though the government is resisting opposition calls for an immediate election, it could well lose the election that is due to take place in January.
"Given such [poll] indicators, latest debt-restructuring threats from possible victors will not be ignored by markets," warned Daragh Maher, deputy head of global foreign-exchange strategy with Crédit Agricole in London. "Clearly, such a restructuring would have significant ramifications for all European debtor nations."
With contagion fears already rampant, the yield spreads of 10-year peripheral euro-zone bonds against those of Germany continued to widen. Furthermore, the cost of credit-default swaps for Ireland, Spain and Portugal all hit new record highs.
In the meantime, financial markets are waiting for further details of the debt rescue package put together for Ireland by the European Union and the International Monetary Fund, as well as the four-year budget plan that Dublin intends to adopt.
All this helped to ensure that the latest Ifo survey from Germany had minimal impact on the euro, even though the business-sentiment index rose to a new record high of 109.3 for November, up from October's originally reported level of 107.6.
Analysts cautioned that any optimism is unlikely to last. "Business and consumer sentiment might well be hit by the need for bailouts of weaker euro-zone members," said Jennifer McKeown, senior European economist with Capital Economics.
