New York: The euro plunged to an 11-month low Tuesday and US stocks fell as worries about Europe’s debt crisis mounted and the Federal Reserve said market turbulence may pose risks for the US economy.
The euro zone agreed to impose stricter budget discipline on members last week but markets were not convinced it had done enough to solve a two-year old debt crisis.
As a result, investors were bracing for credit downgrades for multiple euro zone governments, possibly including France and Germany. That helped drive the euro as low as $1.3007, its worst showing since January.
“The euro has come a long way to multi-month lows but frankly, I am not tempted to take profit,” said Neil Jones, a strategist at Mizuho Corporate Bank. “I am not certain what future euro negatives lie ahead. I’m just certain there will be more.”
Fitch Ratings said the euro zone failed to provide a “comprehensive” solution to the crisis and Standard & Poor’s warned of a possible downgrade to 15 euro zone countries.
Traders were “on pins and needles waiting to hear from a ratings agency,” said Kevin Flanagan, chief fixed-income strategist at Morgan Stanley Smith Barney.
Fed Stands PAT
While the Fed did not announce any new policies to boost growth and said the economy had improved modestly, it added that a brewing European recession could complicate the US economic outlook.
“If you read between the lines, what they’re saying is the economic outlook for the US improved marginally, but don’t get comfortable because the global dark clouds can end up causing a little rain and a little bit of disappointment,” said Anthony Chan, chief economist at JP Morgan Private Wealth Management.
The S&P 500 index fell 0.9% to close unofficially at 1,225.29, while the Dow industrials closed down 0.6% at 11,950.36.
“This is starting to look like a year-end liquidation,” said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey, who said some stock traders were also disappointed by the Fed’s failure to hint at any new stimulus measures.
German chancellor Angela Merkel added to the uncertainty when she rejected talk of raising the funding limit of a future bailout fund above €500 billion.
Dolan said that looked like part of an all-too-familiar pattern where “markets get their hopes up and then Germany pulls the rug out from under everyone.”
Against that backdrop, market participants said they were steering clear of the euro.
Oil gets a boost
An index of top European shares added 0.6%, but the MSCI global stock index fell 0.4% and Tokyo’s Nikkei closed down 1.2%.
Worries about the world economy stoked demand for US Treasuries, driving the benchmark 10-year yield down to 1.96%.
Gold fell more than 2% after the Fed failed to signal any new easing measures. Gold is up some 14% so far this year, driven partly by fear the Fed’s easy-money policy will stoke future inflation.
Oil prices, though, rose more than 2%, partly on worries over possible supply disruptions in Iran, traders said.