The Euro has slumped to its lowest level against the dollar in nine years amid the prospect of a Greek exit from the Eurozone as well as speculation that the European Central Bank has moved closer to large-scale sovereign-bond purchases.
The EU currency fell Monday by 1.2%, exchanging against $1.1864, marking the rate it weakest since March 2006. It later recovered slightly to $1.19370.
A senior analyst with FxPro, Agnus Campbell, was quoted by BBC as saying that the Euro faced increased volatility as Greek general election drew close.
A Greek snap election will be held on 25 January after Prime Minister Antonis Samaras failed to push through his choice for president late last year.
As radical anti-austerity, the Syriza Party, rides high in the polls. The possibility of its victory in the election has sparked fears in the European markets on whether Greece will stick to the terms of its international bailout and stay in the eurozone.
According to Bloomberg NewsWeek, Mr. Samaras has warned the election may lead to Greece exit from the euro region should the Syriza party win.
Meanwhile, reports in Der Spiegel, a German magazine on Saturday claimed the German government believes the currency bloc could deal with Greece’s departure.
But in reaction to the Der Spiegel reports, German chancellor Angela Merkel has said she is confident the Mediterranean nation will stick to the terms of its €240bn (£190bn) bailout agreed between the International Monetary Fund, the European Central Bank and the European Commission, a spokesman for Merkel told Associated Press.
The Independent quoted Stan Shamu, market strategist at IG in Melbourne, Australia as saying: “Greece could spoil the party in coming weeks as talk of a ‘Greek exit’ resurfaces. The past year has been hard enough for the European Central Bank as the region fought severe economic challenges and attempted to resuscitate growth,”
A strengthening dollar is also depressing the euro, with the dollar index at a nine-year high. The dollar rose to the strongest in almost a year against the euro amid speculation the Federal Reserve will raise interest rates in 2015.”
Also, the euro drop follows European Central Bank president Mario Draghi’s comments indicating the bank could soon start quantitative easing.
Speaking in an interview with German newspaper, Handesblatt, Mr. Draghi hinted that the bank might soon start a policy of QE by buying government bonds, thus copying its counterparts in the UK and US.
The ECB’s first major policy meeting of the year is on 22 January. So euro may remain in focus and face instability as that date draws close, which is just few days from Greek election.