The euro took a hit on Thursday as a failure by the European Central Bank (ECB) to initiate strong policy measures took its toll. In addition, steady selling of the currency by an Asian sovereign account and an eastern European sovereign account contributed to the downward pressure.
Reuters reported that the lack of strong measures by the ECB, combined with selling, were driving the euro down and peripheral euro zone bond yields up. However, buying by the ECB helped to restrain the latter. The Euribor rose again as well, hitting a 1¾-year high for the three-month rate of 1.094%. As reported by AdvisorOne on Wednesday, it had risen to 1.089%, its highest level in a year and a half.
Portugal in particular suffered on the issue of new five-year benchmark bonds, as the yield rose over worries about the ECB's inaction. The bonds traded heavily but the bid price fell well below its initial reoffer price of 99.762 to 97.29; the yield rose to more than 7%. Yields for the 10-year Portuguese bond also rose to a euro-era high of 7.4%; 7% is considered unsustainable.
Raghav Subbarao, currency strategist at Barclays Capital, said in the report, "It looks as if the market has got a bit ahead of itself with the euro as concrete policy measures to address the debt crisis are unlikely to materialize before the end of March." He went on to add, "There are also downside risks that the ECB may not be prepared to hike rates as the potential that bondholders may be forced to take debt haircuts."
This also contributed to the euro's fall; Lorenzo Bini Smaghi, a member of the ECB executive board, had said on Wednesday that debt haircuts would result in an immediate run on banks.
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