The euro plunged to a two-year low against the dollar on Tuesday and further declines are likely as European ministers failed to ease fears over the debt crisis.
In addition, investors are awaiting a court ruling on the bailout fund. “It’s almost like we’re drilling for oil – we’re slowly going down with the euro, “said Matthew Lifson, a senior trader and market analyst at Cambridge Mercantile Group in Princeton, New Jersey.
The euro has no backbone at the moment and thus has lost stability. Eurozone ministers agreed to give Madrid subsidies for another year to meet all its targets by 2014. In exchange, further budget cuts have been called for. Regarding aid to Spanish lenders, they did not agree on a specific amount, but said about EUR 30 billion would be available by the end of July. Markets were disappointed that nothing more came out of the meeting.
Lifson also said, “There are certainly positive things to report from Europe in terms of that, but they’re mostly small steps and I don’t think there’s a unified plan.” Investors were also anxious as the court hearing began to determine whether the euro-zone bailout fund, is compatible with German law. The court is not exactly known for being pro-Europe, and an unfavorable ruling could jeopardize integration plans. Finance Minister Schäuble said a significant delay in approving the bailout fund could trigger turmoil in financial markets and weaken confidence in the euro zone.
Italian Prime Minister Mario Monti, is under enormous pressure from the market and is expected to prop up his country’s economy to avoid being dragged into the center of the debt crisis. Good news for the euro came from a drop in Spanish and Italian borrowing costs. Spain has fallen back below the critical 7 percent level.
Analysts said political hurdles, such as the use of the euro zone bailout fund and preventing further contagion of a country, remain a serious issue.