By David Keohane
The euro fell sharply on Wednesday morning after eurozone finance ministers once again failed to agree a deal that would allow them to extend long-overdue aid to Greece and instead called another meeting for early next week.
The single currency fell 0.6 per cent against the US dollar in early trading to hit a low of $1.2737 before clawing back some of its losses to trade down 0.3 per cent at $1.2782.
The euro’s fall was contained by a sense in the market that a new deal could be reached before long, despite the presence of a variety of “red lines” – the most significant revolving around the International Monetary Fund’s desire to see eurozone creditors take a hit on their holdings of Greek debt, something Germany in particular is loath to allow.
The inverse position is the IMF’s refusal to give Athens an extra two years to 2022 to meet a debt target of 120 per cent of GDP, a level deemed sustainable by the Fund. Either an official sector haircut or an extension are seen as necessary for that level to be reached.
The euro also lost 0.3 per cent to £0.8028 against sterling, which was supported by the release of the minutes from the Bank of England’s November policy meeting.
The minutes confirmed that a large majority of the BoE’s monetary policy committee voted to leave the Bank’s asset purchase programme unchanged.
Sterling traded flat against the dollar as the dollar index gained from the risk-adverse environment, ticking up 0.2 per cent to 81.1 points.
The greenback continued to climb against the yen, up another 0.6 per cent as the Japanese currency hit Y82.17 for the first time since early April.
The yen has now lost 3.4 per cent against the dollar since the announcement of early elections on November 9.
Shinzo Abe, head of the opposition Liberal Democratic party and current opinion poll favourite to be the next prime minister following elections on December 16, has been a vocal proponent of powerful new easing measures being taken by the Bank of Japan. The publication of the LDP’s election platform overnight confirmed that view.
The campaign platform included a pledge to introduce a 2 per cent inflation target and an intention to alter Bank of Japan law in order to “strengthen co-operation” between the central bank and the government.
Significantly, the LDP said it would also consider creating a public-private fund to buy foreign bonds. Derek Halpenny at Bank of Tokyo-Mitsubishi said the foreign exchange market had reacted to this particular aspect of the policy document as there was a perception that only policies that directly tackle the strength of the yen would have a chance of success.
Copyright The Financial Times Limited 2012.