Euro slumps to over 4-year low as top Europe bank raises red flag

  • Reuters, London/Berlin
  • Updated: Jan 03, 2015 01:53 IST

The euro sank to a four-and-a-half-year low against the US dollar on clear indications that the European Central Bank (ECB) will soon embark on outright money-printing.

Yields on government bonds issued by the euro zone's heavily indebted southern member states - which the bank would be expected to buy in any such campaign of quantitative easing - fell after ECB president Mario Draghi said the risk of it falling short of its mandate on inflation targeting had risen compared to six months ago.

The divergence expected between European and US monetary policy in 2015 dominated currency markets' thinking last year, and Draghi's warning the ECB was preparing for more action added to expectations that it will step in soon.

"The risk is on the downside for the euro after these comments," said Niels Christensen, a forex strategist at Nordea in Copenhagen. "It could break below $1.20 since there is a risk of a very low inflation reading out of the euro zone next week. That will just add to pressure on the ECB to take measures when it meets later this month."

The ECB, which targets inflation at just below 2%, next meets on policy on January 22. Euro zone inflation next Wednesday is forecast to show prices falling in annual terms.

The interest rate premium investors demand to buy Spanish over German bonds dipped below 100 basis points for the first time since April 2010, reflecting expectations yields in Spain, Italy and Portugal would fall in any QE campaign.

The euro sank as far as $1.2035, depths last seen in mid-2010, while the dollar notched up a near nine-year peak against a basket of major currencies and rose to 120.47 yen.

A senior member of Angela Merkel's party warned the ECB not to pour money into Greece and other euro zone states through bond purchases, saying this would reduce pressure on them to enact the much-needed reforms.

Michael Fuchs, deputy parliamentary floor leader of the German chancellor's Christian Democrats (CDU), told Deutschlandfunk radio: "We shouldn't pump extra money into these states, but rather make sure they continue along the reform path. I'd be grateful if (ECB president Mario) Draghi would make statements along these lines."

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