The euro sank briefly to a nine-year low against the dollar yesterday, as investors' nerves frayed over the political turmoil in Greece and expectations rose that the European Central Bank will defy German scepticism and start buying government bonds.
The euro's move was followed by data from Germany showing inflation had fallen to the lowest level in more than five years in December, raising the chances of an outright decline in prices in the currency bloc when the data is published tomorrow.
The slump in oil prices helped drag down consumer inflation in the euro zone’s most powerful economy to 0.1 per cent in the year to December, down from 0.5 per cent in November, according to preliminary data from Germany’s official statistics office.
US crude oil dropped below $50 a barrel for the first time in 5½ years, sending energy stocks into a tailspin and fuelling a broader sell-off on Wall Street as fears grew of a global economic slowdown.
Economic threats
The nervous start to the year on financial markets reflected growing fears the world was facing the twin threat of slower growth and deflation, combined with worries about the impending Greek elections and the speed of the oil price fall.
It has provided further ammunition for ECB president Mario Draghi to begin a bond-buying programme that Germany's Bundesbank is reluctant to implement.
After sliding to a 4½-year low at the end of last week, the euro's fall intensified yesterday after a weekend article in Der Spiegel, citing unnamed sources, that said Berlin was ready for Greece to exit the euro zone if the Syriza party won this month's snap election and reneged on reforms.
Chancellor Angela Merkel’s government insisted Germany still assumes “Greece will continue to meet its obligations”.
Kit Juckes, economist at Société Générale, said: "If you're a politician outside Athens you've got to sound tough. But the European project needs strengthening, not undermining." The euro had already fallen 0.8 per cent on Friday after Mr Draghi warned the risk of the central bank failing to meet its price stability mandate was "higher than it was six months ago".
Further catalysts for euro weakness could come tomorrow when economists expect Eurostat's "flash" reading for December consumer prices to give the first negative print since 2009, with a reading of minus 0.1 per cent year-on-year. The release of minutes from the US Federal Reserve Board's December meeting is also expected to highlight the contrasting trajectories of the two central banks. The minutes are likely to give a better sense of when US policymakers anticipate raising benchmark interest rates. – Copyright 2015 The Financial Times Limited
