Reuters | Fri May 14, 2010 | 5:17pm IST
The euro hit an 18-month low versus the dollar and European shares fell sharply on Friday on speculation that fiscal austerity in some euro zone countries may stifle economic growth. High-risk assets including stocks took a hit and worries about the euro zone debt crisis prompted demand for safer investments, pushing gold to a record high while the dollar hit its strongest versus a currency basket in a year. European authorities announced a massive debt safety net for Greece, Spain and Portugal this week, but investors remain sceptical whether those countries can take the pain of overhauling their poor public finances. Such uncertainty drove the euro as low as $1.2433 according to Reuters data, its weakest since November 2008, having broken through options barriers at $1.2500 and $1.2450.
Gold prices, which often climb in times of risk aversion, soared to a record high of $1,248.95, while the yellow metal priced in euros, sterling and Swiss francs also hit its strongest ever. "The uncertainty brought about by sovereign risk is pushing markets lower," said Nick Parsons, head of markets strategy at nabCapital. "Until we get clarity about whether austerity measures can be implemented, risk markets will head lower." Such uncertainty pushed the MSCI world equity index down 1 percent, while the FTSEurofirst 300 index fell 2.0 percent. U.S. stock futures pointed to a lower opening on Wall Street.
The weak euro helped to push the dollar up to 85.873 against a basket of major currencies, its highest since April 2009. The single European currency is poised to fall roughly 2.5 percent against the dollar this week, unable to sustain a relief rally to $1.31 hit earlier this week after the EU announced its debt aid plan. "The euro hasn’t derived any benefits from any budget cuts from Spain and Portugal," said Chris Turner, head of FX strategy at ING, which forecasts the euro will be at $1.15 in six months. "People are either concluding that these cuts will be unsuccessful and debt sustainability remains a key issue, or they will be successful in aggressive fiscal tightening and that these economies would slow aggressively and the European Central Bank has to keep interest rates low."
The EU’s emergency assistance plan has done little to bolster confidence in the euro system, a concern highlighted by U.S. While House Economic Adviser Paul Volcker, who on Thursday said Europeans debt troubles could undermine the single currency. U.S. crude oil fell roughly 2 percent on the day to hit a three-month low of $72.72 per barrel. Risk aversion boosted bond markets, driving the June bund future up 62 ticks to 126.48. Parsons at nabCapital said investors have been taking risk off the table, pulling out of equity shares since year-to-date returns on stock markets fell into negative territory earlier this month. Investors’ anxiety towards riskier assets also has been reflected in the movement of cash between markets this week. Money market funds, perceived to be among the least risky investments, attracted new money this week for the first time since January as investors moved back into cash, data from EPFR Global showed. At the same time, the amount of money pulled from risky, high-yield bond funds hit a five-year high, while equity funds in emerging markets also suffered.