Euro continues descent
LONDON, England
THE euro fell to a one-year low against the dollar yesterday as it continued to lose support from speculation that the European Central Bank could start pumping money into the ailing eurozone economy to spur growth.
The bank, which oversees monetary policy for the 18 countries that use the euro, is under pressure to do more at its meeting on Thursday to get the economic recovery across the 18-country eurozone back on track and inflation back toward its target.
The prospect that it could start a programme that would create more euros has been weighing on the currency for weeks. Figures from the US Commodity Futures Trading Commission have shown trades selling the euro are at a near-record, meaning there is a risk of the currency snapping back higher if the ECB fails to back up its recent talk of stimulus with action.
Yesterday, the euro fell to US$1.3110, its lowest level since the US$1.3103 it struck on September 6, 2013.
Though the existential crisis surrounding the eurozone has diminished since ECB President Mario Draghi pledged in 2012 to do “whatever it takes” to save the euro, the eurozone economic recovery has been muted.
In fact, in the second quarter of this year, the recovery ground to a halt as the eurozone recorded zero growth largely as a result of problems in large economies such as Germany, Italy and France. Though the crisis in Ukraine has been blamed for much of the slowdown — particularly in Germany, Europe’s largest economy — by hurting investor confidence, it’s clear that the region’s underlying economic momentum is fading. The eurozone now faces the prospect of an unprecedented triple-dip recession.
Further weighing on the outlook has been a sharp fall in inflation. In August, prices were only 0.3 per cent higher than the year before, way short of the ECB’s target of just below two per cent. The worry is inflation may become deflation — a bout of falling prices that can choke growth as consumers delay spending in the hope of bargains down the line and businesses fail to innovate.
That’s why the ECB is under pressure to do more than it already has. In June, it cut its main interest rate to a record low of 0.15 per cent. Draghi has also said more monetary stimulus — such as quantitative easing, or QE — is possible. Such a programme would inject new money into the economy in the hope of lowering market interest rates.