Euro hits four-year low on fears debt crisis will spread
• Comments by Germany's Angela Merkel see euro near $1.22
• ECB head tells Europe to do more to tackle budget deficits
Fears that Europe's financial crisis will escalate pushed the euro to a four-year low today, bringing it closer to parity with the dollar.
The financial markets continued to pile pressure on Europe's political leaders, sending the euro to $1.2234 at one stage – its lowest level since April 2006. The European single currency has fallen sharply against the dollar since the start of May, losing more than 7% of its value.
Today's losses came after German chancellor Angela Merkel said that the €750bn (£640bn) eurozone rescue package announced a week ago was not a permanent fix for the area's weaker members.
"We've done no more than buy time for ourselves to clear up the differences in competitiveness and in budget deficits of individual eurozone countries," Merkel told union leaders yesterday.
"If we simply ignore this problem, we won't be able to calm down this situation," she added.
Uwe Parpart, chief Asia strategist at Cantor Fitzgerald, warned that on its present trajectory the euro will "lurch toward parity with the US dollar and through it before year-end, then disintegrate.
"EU politicos are unwilling and unable to face the urgent need for across-the-board fiscal consolidation. The market sees that and reacts."
Traders still fear that the Greek debt crisis could spread to other eurozone countries such as Portugal, Ireland or Spain – which all have high deficits.
Jean-Claude Trichet, the president of the ECB, warned yesterday that Europe's governments need to take tougher action to address their ballooning debts.
"There is a need for a quantum leap in the governance of the euro area," Trichet said.
Finance ministers from across Europe will meet in Brussels today, and are expected to discuss plans for a new, tough deficit-reduction programme that could restore faith in the eurozone. The meeting is also expected to see an early defeat for Britain's new government over the introduction of transparency standards for hedge funds. France and Germany are likely to push the measures through, despite opposition from the UK and the US.
No shortage of euro bears
Howard Archer, chief European and UK economist at IHS Global Insight, is concerned that the €750bn bailout package has failed to allay fears that some European governments could default on their debts.
Portugal, Spain and Greece have all recently announced tough fiscal austerity measures in an effort to reassure investors. But as Archer points out, this could also hamper efforts to grow the European economy.
"The euro is caught between a rock and a hard place at the moment, and it is hard to see how it can extract itself from this uncomfortable position in the near term at least. Indeed, we suspect that the euro is headed down towards $1.15 over the coming weeks," Archer predicted in a research note.
But Jim O'Neill, Goldman Sachs' chief economist, argues that the swing against the euro has now gone too far. He told Bloomberg TV that when he asked a recent gathering of 600 Goldman clients how many thought the euro would be higher in a year's time, just three raised their hands.
"That's how bearish people are. Based on my 29 years' experience of the foreign exchange markets, that means it's virtually guaranteed that the euro isn't going to go much lower," said O'Neill. He believes the euro could fall to $1.21 before rebounding.
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