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By Peter Garnham
Published: June 16 2011 11:42 | Last updated: June 16 2011 11:42
The euro dropped to a three-week low against the dollar and a record trough against the Swiss franc on Thursday as fears over a default in Greek government debt intensified.
The inability of eurozone central bankers and finance ministers to agree on a deal for a second bail-out of debt-stricken Athens continued to undermine the single currency.
Adding pressure on the euro were growing internal problems in Greece, with protests against the government’s austerity measures turning violent and George Papandreou, Greek prime minister, attempting to form a new cabinet and putting himself forward for a vote of confidence.
Analysts said the market was becoming increasingly sensitive to contagion risks from the crisis in Greece, not just to other sovereign states but also to Europe’s banking sector.
“Fears about a contagious, as opposed to a managed, Greek default have intensified,” said Lena Komileva at Brown Brothers Harriman.
“As ever, the economic arithmetic of Greece’s insolvency is little changed, instead the markets are trading the risk that the political management of the eurozone crisis will fail.”
The euro sell-off was given added impetus after Nout Wellink, an European Central Bank board member, said Europe’s bail-out fund might need to be doubled following a fresh Greek rescue deal.
The euro fell 0.3 per cent to $1.4115 against the dollar and lost 0.8 per cent to Y113.74 against the yen.
The euro also dropped to a fresh record low SFr1.1954 against the Swiss franc, before regaining some poise to stand down 0.7 per cent at SFr1.2006, as concerns over the eurozone’s debt problems drove haven demand for the Swiss currency.
The strength of the Swiss franc came despite the Swiss National Bank striking a dovish tone after its decision to leave interest rates unchanged at record low levels at its policy meeting.
The SNB admitted that the outlook for growth had “dampened”, raising concerns over the effect of Swiss franc strength on its export sector and saying that rise in the currency was keeping inflation in check.
Emilie Gay at Capital Economics said the SNB was likely to keep interest rates on hold at least until the end of the year.
She added, however, that as the eurozone debt crisis intensified further, and concerns about fiscal problems in other advanced economies such as the US increased, haven flows were likely to strengthen the Swiss franc.
“Accordingly, we now see the franc appreciating against the euro to SFr1.15 by the end of this year and SFr1.00 by the end of 2012.”
The euro did advance against the pound, however, rising 0.1 per cent to £0.8759 after UK retails fell by more than double the consensus forecast in May, raising further doubts over the strength of the UK recovery.
The pound fell 0.4 per cent to $1.6114 against the dollar and was 0.9 per cent weaker at Y129.86 against the yen.
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