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The euro dropped to a seven-month low against the dollar and a 10-year trough against the yen on Monday as fears over an escalation of the eurozone sovereign debt crisis undermined the single currency.
Worries that Greece was set to default on its debt unnerved investors, while speculation that several large French banks could be downgraded due to their exposure to Athens also weighed on sentiment.
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The euro was also suffering from the fall-out of last week’s decision by the European Central Bank to abandon its hawkish stance on interest rates and the resignation of Germany’s Jurgen Stark from the central bank’s executive committee.
Mr Stark reportedly resigned due to his opposition to the ECB’s bond buying programme, a move that some believed undermined the central bank’s credibility on inflation.
Steve Barrow at Standard Bank said inflation was the most important determinant of currency values over the long haul, with a central bank’s anti-inflation credibility with the market a crucial ingredient for currency strength or weakness.
“The euro has performed well through all manner of carnage in the debt market because the ECB has strong anti-inflation credibility,” he said.
“However, the debt crisis could be slowly chipping away at the ECB’s anti-inflation credibility and Mr Stark’s shock resignation could prove to be the biggest chip yet.”
The euro fell 0.4 per cent to $1.3594 against the dollar, its weakest level since February, lost 1.2 per cent to a 10-year low of Y104.66 against the yen and dropped 0.1 per cent to a six-month trough of £0.8585 against the pound.
The euro also fell 0.2 per cent to SFr1.2046 against the Swiss franc.
This pushed the franc towards the SFr1.20 ceiling imposed last week by the Swiss National Bank against the euro in a bid to rein in its currency and stave off recession in the Swiss economy.
Valentin Marinov at Citigroup said further deterioration of sentiment towards the euro could mean that investors would start testing the resolve of the Swiss monetary authority to maintain the ceiling.
“We think that the SNB has the resources to keep the euro from slipping below SFr1.20 for now,” he said. “The task is likely to be difficult, however.”
Meanwhile, haven demand boosted the yen as global equity markets suffered, pushing it up 0.8 per cent to Y76.94 against the dollar.
The dollar benefited elsewhere, however, as global deleveraging pushed investors towards the liquidity of the dollar.
The dollar was up 0.3 per cent at a two-month high against the pound, 1.5 per cent higher at $1.0302 against the Australian dollar, often seen as a barometer of investor risk appetite, and rose 0.3 per cent to SFr0.8860 against the Swiss franc.
