The European single currency sank under 1.26 dollars on Thursday, nearing a 14-month low as investors sought the safe-haven US currency amid fresh fears of a sovereign default in the eurozone.
At about 1330 GMT, the euro tumbled to 1.2540 dollars, from 1.2615 dollars in New York late Wednesday. That was not far from the 14-month low of 1.2529 dollars that was struck one week ago.
“It is difficult to put together an argument that would favour buying euros at present,” said Jane Foley, research director at trading site Forex.com.
“There are significant flaws in the fiscal coherence of EMU (European Monetary Union) and this implies scope for further event risk that would pressure the euro.
“At the same time, Greece’s problems have heightened investor awareness of sovereign default risk. This is creating demand for safe haven assets which may prompt a period of broad-based dollar strength,” she added.
The shared eurozone unit has been dogged by concerns about the ability of eurozone nations like Greece, Portugal and Spain to impose tough austerity measures to curb sky-high deficits.
“There are any number of reasons to be bearish (negative) on the euro, including growth underperformance against the United States, divergent growth prospects within the eurozone, fiscal concerns, political risk and ongoing unease about the ability of governments to deliver the kind of structural adjustments necessary,” said Credit Agricole CIB analyst Daragh Maher.
Other experts argued that the euro was hit hard by the European Central Bank’s government bond buying scheme which has sparked fears of higher inflation.
The ECB announced on Monday it would intervene in securities markets to buy government and private debt, a move that represents unprecedented and controversial support for troubled eurozone governments.
The initiative was aimed at halting speculative attacks in the eurozone and restoring stability to bond markets.
“The bond purchase program being utilised by the ECB is a form of monetary easing, in the same way that the Bank of England, Bank of Japan and the Federal Reserve have done over the past two years,” CMC Markets analyst Michael Hewson told AFP.
“This will effectively devalue the euro and as such we should continue to see the effects of this over the coming weeks,” he said.
However, the ECB insisted Thursday that the scheme was “essential” to reducing tensions in eurozone financial markets.
The ECB report also maintained that its purchases would be “sterilised” by other operations.
The central bank would sell an equivalent amount of government debt it already holds as collateral against loans, or other financial instruments it could now create, to balance out the purchases.
The aim would be to prevent an increase in the eurozone money supply that would fuel inflation.
However, Hewson added: “The ECB talk about sterilising the bond purchases by equivalent asset sales is slightly misleading.
“Buying a worthless Greek bond and selling an equivalent German bond does not sterilise the process, especially when the sold asset has a higher intrinsic value then the purchased one.
“This is why we are also seeing gold at all-time highs … as investors balance their portfolios” amid fears of rising inflation.
