Tokyo: The euro slumped to a four-year low on Monday, as investors dumped the single currency on sovereign debt worries and fears that recent belt-tightening measures would hurt a recovery in the euro zone area.
The euro extended its losses after falling below $1.2300, where option barriers were said to lurk, and fell as far as $1.2234 on trading platform EBS, its lowest since April 2006.
It has dropped more than 7% against the dollar this month, and is about 14% lower for the year, making it the worst-performing major currency. The euro’s next major trough on charts lies at $1.1640, a low hit in November 2005.
“Technically, the euro has been oversold but since the market is not showing substantial short-covering, players have no choice but to sell the euro,” said a trader at a Japanese bank.
“Risk aversion stemming from the euro zone fiscal crisis will likely keep investors shifting their funds into safer assets such as the dollar, the yen, U.S. Treasuries and gold.”
There are worries about the health of European banks which have exposure to sovereign bonds in Greece and some other euro zone nations with high fiscal deficits, the trader added.
On Friday, the euro had plunged to its lowest level against the dollar since late October 2008 with losses deepening after European Central Bank policymaker Axel Weber saying that it was important not to underestimate lingering dangers to financial stability..
German Chancellor Angela Merkel said on the Sunday the $1 trillion rescue plan stitched together by the European Union and the International Monetary Fund only bought time to sort out the yawning gap between the euro zone’s strongest and weakest economies..
Last week the currency had briefly rallied towards $1.31 after the rescue package was announced before worries about the euro zone’s growth outlook came back into focus. Traders fear that the austerity measures announced by Greece, Spain and Portugal would hurt growth in the near term and force the European Central Bank to keep rates low in the medium term.
An analyst said the euro looked to have further to fall given the relative weakness of the EU’s growth outlook compared with the United States.
“This suggests EUR/USD should be trading below, or at least closer to, its long-run fair-value, which we estimate at around $1.2100,” said Bank of New Zealand currency strategist Mike Jones.
Data released Friday showed speculative bets against the euro hit a record high in the week to May 11..
Against the yen, the euro fell 1.4% to 112.74 yen, heading closer to an eight-year low of 110.49 yen hit earlier this month.
Sterling slid to its lowest level since March 2009 at $1.4249 before edging back to $1.4300, down 1.7% on the day. The pound fell on stop-loss selling and data suggesting that the past year’s rise in British house prices may be cooling.
British newspaper reports saying Britain’s new government was critical of the previous Labour-Party administration’s fiscal policies, weighed on sterling, market players said.
Britain’s new government has inherited “fiddled” public finances, new Finance Minister George Osborne told the Financial Times in an interview published on Monday.
Separately, the Sunday Times online edition reported that the British government has accused Labour of pursuing a “scorched earth policy” before the general election, leaving behind billions of pounds of previously hidden spending commitments.
All the weakness in the euro and the pound were helping the dollar index, which rose above 87.00, the highest since March 2009.
Yen crosses broadly fell with the Australian and the New Zealand dollars dropping more than 1%..
Dollar/yen dropped 0.6% to to ¥91.92.
There was little market impact from comments by Fitch ratings saying it had not taken any action on Japan’s sovereign rating on Monday and that the outlook for the rating is stable, or from earlier rumours that Fitch may downgrade Japan’s rating.
“We have not taken any rating action on Japan this morning. The foreign currency rating is AA, and its outlook is stable. The local currency rating is AA-minus and the outlook is stable,” said Vincent Ho, sovereign rating analyst at Fitch ratings.