In 2007 the forex market marked down the dollar. Late last year it focused on the pound. Now it seems that the “ugly currency baton”, as David Simmonds of RBS puts it, has been passed to the euro. The single currency has fallen by around 13% to a three-month low of under $1.27 this year.
One major problem for the euro is that the eurozone downturn has been nastier than expected. Germany’s economy is shrinking faster than Britain’s and America’s, with GDP down by an annualised rate of over 8% in the fourth quarter. French manufacturers’ confidence is at a 47-year low.
And the new record low in the eurozone’s purchasing managers’ index implies that the economy continued to shrink “at breakneck speed” in the first quarter, says Capital Economics. The fact that the eurozone has been slower to cut interest rates than its British or American counterparts hasn’t helped – the bank is now seen as being behind the curve. The dollar’s status as the global reserve currency also means it tends to benefit from risk aversion.
And now the eurozone’s banking sector is causing jitters. It has €1.3trn of exposure to eastern Europe, where default rates could reach 25%, as we pointed out last week. The sharp downturn in eastern Europe has brought down the Latvian government and prompted calls for the International Monetary Fund (IMF) to double its war chest to $500bn.
This is on top of ongoing fears over possible defaults by ailing economies such as Greece and Ireland, and uncertainty over whether – and how – Germany might bail out weaker nations. No wonder, then, that the euro is under the cosh; Commerzbank’s Lutz Karpowitz thinks it could fall to $1.12 by the end of the year.