Before euro zone finance ministers met on Monday to discuss the European Financial Stability Facility (EFSF), the euro dropped substantially over concerns that no solution would be quickly forthcoming.
Germany had voiced objections over raising the amount of the EFSF, currently set at 440 billion euros ($585 billion), insisting instead on a complete plan to bolster the fund’s ability to perform. Such a strategy would of necessity slow action by the ministers and further rattle wary investors, and would not be agreed upon until March, when European Union (EU) leaders meet.
According to a Reuters report, another contributing factor to the euro’s fall was Spain’s decision to cancel a bond auction that had been scheduled for later in the week. Instead Madrid opted for a syndicated bond issue. Spreads on weaker euro zone nations’ bonds increased against Germany’s paper in the wake of the decision.
The currency recovered somewhat from its drop in response to steady buying by Irish banks.
Athanasios Orphanides, policymaker at the European Central Bank (ECB), dampened expectations of euro zone interest rate hikes when he characterized a statement by the ECB on Thursday that it was ready to act to curb inflation as not “overly hawkish.” He added that occasionally markets overreacted to the meaning of ECB statements. This further contributed to the fall in the euro.
Analysts said, however, that expectations of an increase in inflation in the coming months would keep rate hike expectations simmering.
The three-month Euribor, which had risen on Friday, was up again on Monday, hitting 1.009%. Its Friday increase was its largest, from 0.098% to 1.006%, in a single day since October 21.
The dollar was flat in European markets, and with markets in the U.S. closed for the holiday, it was expected that liquidity would be reduced into Europe’s afternoon trading.
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