Greek fears push euro to nine-year low against dollar

The currency fell to $1.1862 against the dollar before recovering slightly

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The euro tumbled to its lowest level against the dollar in almost a decade on Monday as fears over a Greek exit from the eurozone made an unwelcome return. Investors also bet on the European Central Bank soon starting its own programme of sovereign bond purchases in order to avert a deflationary spiral.

The single currency dipped as low as $1.188 in trading, its weakest level against the greenback since February 2006, although it later picked up slightly to $1.1921. The euro was helped down by weekend reports in the German media that Berlin believes the eurozone can cope with a Greek exit from the single currency should the radical left-wing Syriza party win the general election later this month.

Greek 10-year bond yields also rose close to a 16-month highs of 9.6 per cent in trading yesterday, although they are still well short of the ruinous 30 per cent levels hit at the height of the crisis in 2012, the last time it looked as if Greece was set to crash out of the single currency.

A spokeswoman for Angela Merkel’s government insisted there had been no change in the official position on Greece, but confirmed Berlin’s belief that a Greek exit would not jeopardise the single currency. “The world has obviously moved on since 2012 and in the meantime we’ve created effective measures that are in place for precisely that reason: to stabilise the eurozone,” she said.

Elsewhere, the French President, François Hollande, presented a firm line on Greece. “The Greeks are free to determine their own destiny,” he said in a radio interview.

The leader of Syriza, Alexis Tsipras, has threatened to stop co-operating with the terms of Greece’s eurozone bailout if his party forms the next government, which could result in the country’s effective expulsion from the single currency. He has also called for a restructuring of Greece’s large external debt to its eurozone partners.

Traders were also responding to an interview given at the end of last week by the president of the European Central Bank, Mario Draghi. The ECB will next meet on 22 January, with a growing number of City analysts expecting some form of quantitative easing to be announced, despite opposition from Germany.

“We see a 65 per cent chance for sovereign bond purchases and an 80 per cent chance for corporate bond purchases at one of the next two meetings on 22 January or 5 March, with 22 January the more likely date,” said Holger Schmieding of Berenberg Bank.

Inflation in the eurozone fell to just 0.3 per cent in November, well below the central bank’s official target of just below 2 per cent. And many forecasters expect inflation to turn negative in the coming months if global oil prices continue to decline. The first reading for December is due tomorrow.

Lena Komileva of G+ Economics said declining prices were a serious threat to monetary policymakers in Frankfurt and to all eurozone governments. “Deflation is a risk to the ECB’s credibility but it is also becoming a clear and present danger to financial and political stability, as it boosts support for the radical left [and] undermines social support for reforms,” she said.