By Ritu,
The euro is under pressure Wednesday, as bond markets remind euro zone countries of the costs of the measures needed to combat the coronavirus outbreak.
EUR/USD traded at 1.0971, down 0.2%, after falling as low as 1.0953 overnight.
Europe has become the chief battleground against the virus, with deaths continuing to soar in Italy and Spain, and France beginning a strict lockdown. This has prompted the European Union to ban travellers from outside the bloc for 30 days in an unprecedented move to seal its external borders.
Attention is increasingly turning on how the respective governments within the euro zone will cope with funding the measures needed to combat the virus as well as supporting their battered economies.
The spreads between the yields of government debt in Germany and many of the peripheral eurozone countries have ballooned of late, a reflection of the fact that there is still no convincing mutual guarantee of sovereign debts within the currency union..
The spread between the yield of 10-year Germany debt and that of Greece has increased to 400 basis points from 193 bps at the start of March. Italy has gone from 129 bps a month ago to 284 bps now, Spain from 67 bps to 145 bps and Portugal from 60 bps to 167 bps.
A pointer to the seriousness of the situation is shown by German chancellor Angela Merkel saying Tuesday that Germany is willing to consider a joint EU funding program in order to mitigate the fiscal consequences of the current situation, according to Bloomberg.
Germany was not willing to consider a joint funding scheme in either 2008, during the financial crisis, or in 2012 during the sovereign debt crisis.
“We did not expect the sudden sharp plunge in the euro that sent it to an overnight low of 1.0953,” said FX Strategists at UOB Group. “While oversold, the decline is not showing signs of stabilization just yet. From here, the euro could dip below the overnight low but the next support at 1.0900 is likely out of reach.”
Elsewhere, the U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 100.04, up 0.2% after further sharp gains against commodity currencies. USD/JPY fell 0.3% to 107.39, while GBP/USD fell 0.2% to 1.2031.
