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Eurozone debt fears continued to stalk the region’s single currency as hopes for a common Eurobond were dashed by the leaders of the bloc’s three biggest economies.
The euro fell 0.6 per cent to $1.3307 against the dollar on Friday after Angela Merkel, Nikolas Sarkozy and Mario Monti issued a joint statement following their meeting on Thursday that said conditions were not met for the immediate introduction of a common eurozone bond.
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Meanwhile, the markets were also reacting to a downgrade of Hungary’s sovereign rating to Ba1, a sub-investment grade, by Moody’s, the rating agency.
“This underlines that sovereign debt stress is not confined to eurozone members,” James Thornhill at Citigroup said. Earlier in the week, more questions were raised about the US sovereign rating as senators failed to come to an agreement on a deficit reduction plan.
The euro had been under pressure for most of the week as the slippery run on equity markets dominated the headlines. Friday’s losses on European stock indices extended the losing run on some European indices, including Germany’s Xetra Dax and Britain’s FTSE 100, to ten sessions – the worst streak since 2003.
“The euro looks as if it needs good news now just to stand still,” Paul Bednarczyk at 4Cast said.
It received little good news over the week, however, and with volumes low from the US due to the Thanksgiving public holiday, was even more vulnerable to bad news, the worst of which came from the core eurozone sovereigns of France and Germany.
On Monday, Moody’s raised doubts on the long-term viability of France’s triple A sovereign rating as it warned that recent increases in the country’s debt yields amid ongoing fiscal and economic uncertainty in the eurozone could have “negative credit implications”.
The sale of German 10-year Bunds on Wednesday met with poor demand and raised only two-thirds of the targeted €6bn. On Thursday, yields on the German benchmark unexpectedly rose above those of the equivalent UK 10-year Gilt for the first time since 2009.
Over the week, the euro fell 1.8 per cent to $1.3266 against the dollar and lost 1.2 per cent to Y102.66 versus the yen.
Against sterling, however, the euro climbed 0.5 per cent over the week to £0.8591 as the UK currency came under broad pressure amid speculation that the Bank of England would announce further quantitative easing in the coming months.
The risk of further QE had gained traction following last week’s dovish quarterly inflation report from the Bank, and was given further fuel by the equally dovish minutes from this month’s monetary policy committee, published on Wednesday.
Chris Williamson, chief economist at Markit, said: “The minutes highlighted how the outlook was ‘unusually uncertain’ – clearly the situation in the eurozone looks set to be the main driver of policy in the UK.”
Sterling fell 2.3 per cent over the week to $1.5428 against the dollar and lost 1.5 per cent to Y119.64 versus the yen.
The yen and dollar made ground against most currencies as risk sentiment deteriorated throughout the week. Their most significant gains were against higher-yielding currencies such as the Australian dollar as investors trimmed their positions in riskier trades.
Over the week, the Aussie dollar fell 3.1 per cent to $0.9693 against the US dollar and lost 2.5 per cent to Y74.98 versus the yen. The yen fell 0.6 per cent against the dollar on the week to Y77.40.
