By Peter Garnham and David Oakley in London and Henny Sender in New York
The euro has tumbled to its lowest level in 18 months and might be entering a period of sustained weakness, analysts believe, on fears of years of weak economic growth as austerity measures across the continent bite.
Spain and Portugal this week both announced austerity packages, which were likely to act as a drag on economic expansion in the 16-nation bloc.
Deterioration in sentiment towards the euro has raised concerns that its appeal as a reserve currency, a major support for it in recent years, is diminishing.
“The euro should continue to weaken, potentially quite significantly,” said Mansoor Mohi-uddin, managing director of foreign exchange strategy at UBS.
The euro fell to a low of $1.2359 against the dollar on Friday, its weakest level since November 2008. This took the single currency’s losses to 5 per cent since hitting an intraday high of $1.3093 on Monday.
Sellers of peripheral eurozone sovereign debt have included some of the largest US debt investors, such as Pimco, people familiar with the matter said. Pimco has sold all its holdings of Greek and Portuguese sovereign debt, one such person said.
In some cases, leading money managers have come under pressure from their investors to change their guidelines to rule out purchases of the sovereign debt of peripheral eurozone countries.
“We think it is too risky to buy Greece and Portugal,” said the head of one of the largest US asset managers. “The chance of restructuring is too high. When there is default risk, you scale your exposure differently. There is no value. But even if there was value, our investors still don’t want us to invest.”
Ramin Toloui, a senior portfolio manager at Pimco, said the European Central Bank’s decision to buy government debt could be backfiring. Instead of encouraging private investors to keep their government debt, the programme might be leading to more sales, he said.
“The risk is that investors are using the ECB as a vehicle to exit their positions,” he said.
Steve Barrow, currency strategist at Standard Bank, added: “Finance ministers in the eurozone might argue that they acted to save the euro but, in reality they acted to save national bond markets – and the euro is the fall guy.”
The European Central Bank is expected to explain next week how it will “sterilise” its government bond purchases by reabsorbing the extra liquidity injected, which could quash the idea that they will expand into full-blown “quantitative easing”.
In Frankfurt, Jean-Claude Trichet, ECB president, said it was a “complete fallacy” to say fiscal soundness damped growth. “It is exactly the contrary. It is the absence of fiscal credibility which dampens growth,” he told Handelsblatt, a German newspaper.
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