2010-06-04
LONDON (Dow Jones)--The euro fell to a new four-year low against the dollar Tuesday as concern over euro-zone banks, euro-zone sovereign debtors and the future of Angela Merkel's coalition government took their toll.
General market sentiment was also being undermined by weak Chinese data, fear that the Japanese prime minister could resign and the Israeli attack on aid ships headed for the Gaza Strip.
See the euro's latest dive against the dollar:
http://www.dowjoneswebservices.com/chart/view/4058
Investors were reacting to all this global upheaval with another pull out of risky assets that sent both Asia and European stock markets sharply lower.
The latest rot set in Friday when Fitch downgraded Spain's sovereign debt rating and triggered a new sell-off in the bonds of euro-zone debtors.
The European Central Bank also became part of the problem as the bank's recent policy of buying government bonds proved divisive. Officials at Germany's central bank are questioning the policy, which could weaken the ECB's credibility.
The ECB also issued a warning about euro-zone banks, predicting that they could face another EUR195 billion of bad-debt writedowns over the next 18 months. Fears about the impact this will have on balance sheets means that financing conditions for euro-zone banks could deteriorate even more, making economic recovery for the region that much more difficult.
In the meantime, Germany's ruling coalition came one step closer to collapse after German President Horst Kohler resigned unexpectedly. This was more bad news for Chancellor Merkel, who is already facing difficulty with smaller parties in her ruling coalition over plans to hike taxes to help fund the country's budget deficit.
Many Germans object to the European Union bailout for Greece and expressed their disapproval in recent regional elections.
"Germany might be closer to a coalition break-up than many think," warned Hans Redeker, head of global foreign exchange strategy at BNP Paribas SA in London.
Japanese politics also poses a risk to global sentiment as Prime Minister Yukio Hatoyama could well be forced to resign ahead of Japanese upper-house elections next month. Recent polls show that public support for his government has now fallen all the way to 22% after he broke an election pledge to relocate a U.S. marine base.
The general market mood, meanwhile, wasn't helped by Israel's widely condemned attack on Turkish-registered vessels headed for the Gaza Strip with relief supplies.
Nor did news that China's purchasing managers' index fell last month to 53.9 from 55.7. This, along with a warning that China's property bubble is worse than the ones the U.S. and the U.K., had injected fresh concerns about the global economic recovery.
As investors reduced their risk, the euro fell to $1.2120 at 0930 GMT from $1.2322 late on Monday in North America, according to EBS. This was the lowest level in four years.
The euro was also sharply lower at Y110.11 from Y112.66 while the dollar fell to Y90.80 from Y91.44.
The dollar was also up at CHF1.1699 from CHF1.1560 even though Switzerland reported that first-quarter economic growth amounted to 2.2% on the year, much more than the 1.7% growth that had been forecast.
The pound fell to $1.4463 from $1.4530 even though the latest U.K. PMI index came in unchanged at 58.0 in May instead of falling to 57.5 as expected. This result, which keeps the index at its highest level in 14 years, suggests that manufacturing activity remains strong.
However, sterling could have found some support from suggestions that Prudential's planned $35.5 billion takeover of AIG's largest Asian life-insurance unit is falling apart. News of the initial deal had hurt sterling, given the size of dollar purchases that are likely to be involved.
Source: online.wsj.com
