Posted on May 17, 2010 - by Venik

Euro falls to four-year low against dollar as its reserve status dips

Single currency continues to slide after Angela Merkel says eurozone rescue package is not a permanent fix

The euro continued its slide today and hit a four-year low against the dollar, sparking talk of parity and concern that it is losing its appeal as a reserve currency.

The markets piled further pressure on Europe’s leaders, sending the euro to $1.2234 at one stage – its lowest level since April 2006. The European single currency has fallen sharply against the dollar in May, losing more than 7% of its value.

The losses came after the German chancellor, Angela Merkel, said that the €750bn (£640bn) eurozone rescue package announced a week ago was not a permanent fix for the area’s weaker members.

The euro clawed back some losses after the European Central Bank said it would absorb €16.5bn from the money markets to compensate for bond purchases up to 14 May, and Greece said it would receive the first tranche of emergency loans tomorrow.

Uwe Parpart, chief Asia strategist at Cantor Fitzgerald, warned that on its present trajectory the euro would “lurch toward parity with the US dollar and through it before year-end, then disintegrate”.

Russia had already cut the share of euros in its currency reserves to 43.8% in 2009 from 47.5% a year earlier, Interfax reported, citing central bank data. The dollar’s share rose to 44.5% from 41.5%, while the pound’s rose to 10.4% from 9.7% and the yen was unchanged at 1.3%.

Paul Robson, of Royal Bank of Scotland, said: “While central banks might not be active sellers of euros, they are not buying them to the same degree they were a year ago and might be accumulating more dollars.”

But, he said, there were few major currencies for banks to invest in. “The euro is still the largest currency and probably the most liquid after the dollar. Where else do you put your money?”

The yen has virtually no yield but sterling could benefit in the long run. “It might catch the eye of a central bank or two. This would be good for holidays but not so good for exporters,” Robson said.

Amid much talk of the euro lurching towards parity against the dollar, Barclays Capital, however, saw “good reasons why the depreciation will not turn into a rout”. Paul Robinson at BarCap said: “This is not a repeat of the post-Lehman bankruptcy meltdown.In aggregate the euro area has enough funding to cover any short-term needs. There has been no sign that the authorities will allow the crisis to lead to wholesale crisis.”

Japan’s public pension fund, the world’s largest, said it was inappropriate for a long-term investor to sell euros while authorities around the world were taking joint action to support Greece in its debt crisis. The pension fund’s new chairman, Takahiro Mitani, said it was keeping its portfolio unchanged.

European central bankers and politicians insisted that the level of the euro was no cause for concern.

The three-month euro Libor rate – the rate at which banks lend to each other in the money markets – rose to 0.63125 from 0.62875 on Friday, a sign that markets remain nervous. The dollar Libor rate climbed to 0.46 from 0.44506.

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