The euro fell broadly on Monday as hopes for an increase in the eurozone’s bailout fund faded and as investors reassessed a recent rise in European Central Bank interest rate expectations.
Uncertainty about whether Germany would support an increase in the lending capacity of the rescue fund, known as the European Financial Stability Facility (EFSF), clouded sentiment.
Europe set up the safety net fund, which can borrow on the markets with eurozone government guarantees of up to 440 billion euros, in response the debt crisis that forced Greece and Ireland to take bailouts last year. But a new package of anti-crisis measures is seen as unlikely to come any time soon.
Attention on Monday was focused on a meeting of eurozone finance ministers, at which an increase in the effective lending capacity of the rescue fund is expected to dominate discussion.
Senior European sources told Reuters the sense of urgency in Berlin for boosting the fund had diminished after successful bond auctions last week in Spain and Portugal, the two countries seen most at risk of needing any further bailouts. Instead Germany is pushing for broader anti-crisis measures to be agreed at a summit of European Union leaders in March.
“It’s becoming increasingly apparent that Germany doesn’t want an increase in the rescue fund and that’s weighing on euro sentiment today because there were positive expectations building last week,” said Manuel Oliveri, currency strategist at UBS in Zurich.
“We believe the euro is a sell on rallies because investors are not minded to buy euro-denominated assets while structural problems in the eurozone persist,” he added. The euro traded at $1.3270, down about 0.8 percent on the day after falling as low as $1.3243 on trading platform EBS.
It was off a one-month high of $1.3458 hit on Friday when speculators went long after solid debt auctions from Spain and Portugal, hawkish comments on inflation from European Central Bank President Jean-Claude Trichet and hopes that eurozone policymakers may expand their rescue funds. ECB policymaker Athanasios Orphanides played down rate hike expectations, saying last Thursday’s statement was not overly hawkish and that there was sometimes an overreaction to the underyling message.