The euro plunged to a four-year low against the dollar yesterday on fears that unpopular measures to deal with Europe's sovereign debt crisis could damage economic growth.
The single currency has been on the slide since January, pushed down by concerns that Greece's deficit woes could spread to other highly indebted eurozone countries such as Spain and Portugal.
The euro did see a brief boost early last week, following the announcement of the €750bn (£641bn) rescue package designed to shore up confidence in the eurozone. But the single currency was soon tumbling again, dropping to a post-Lehman low on Friday and to $1.2234 – its lowest level since April 2006 – in morning trading yesterday. It has now lost more than 7 per cent in the last month and 14 per cent over the year, with some analysts predicting that it may yet slip to parity with the dollar.
Politicians and central bankers from across the bloc were stressing repeated at the weekend that the bailout measures will only "buy time", and that eurozone countries must see through rigorous deficit reduction.
Angela Merkel, the German Chancellor, said: "We've done no more than buy time for ourselves to clear up the differences in competitiveness and in budget deficits of individual eurozone countries."
Jean-Claude Trichet, the president of the European Central Bank (ECB), called for a "quantum leap" in governance across the eurozone, as the bloc faced up to "the worst situation since the Second World War".
But the continued slide in the euro suggests that markets are both sceptical that austerity measures will materialise in the face of sharp public opposition, and at the same time concerned that harsh cuts will put a brake on economic growth, potentially pushing fragile members back into recession.
"The euro is caught between a rock and a hard place at the moment, and it is hard to see how it can extract itself from this uncomfortable position in the near term at least," said Howard Archer, the chief European economist at IHS Global Insight, who is predicting that the euro will fall as low as $1.15 over the coming weeks.
Sterling also slid to its lowest level since March 2009 yesterday, hit by data showing cooling growth in the housing market in May. But the FTSE 100 share index rose slightly, with falls in the banks and miners offset by strong improvements from BP.
The eurozone bailout package includes €440bn-worth of loans and guarantees, a €60bn expansion of an existing balance of payments facility and a further €220bn from the International Monetary Fund. The plan also includes a commitment from the ECB, under which it will buy up government bonds in markets it considers "dysfunctional".
Despite the bank's emphasis that such purchases will be "sterilised" in inflationary terms – by equivalent sales elsewhere – the move is nonetheless a major policy U-turn from an institution created with a mandate to maintain price stability.Reuse content