Euro drops as traders prefer risk aversion

02-02-2009 15:45

Today, the European currency fell against the yen while traders preferred ‘safe cash’ after selling the risky assets as the Asian stock markets stumbled. Investors believe that the inflation report will increase the chance of the European Central Bank lowering the interest rate. The early trading session resulted in a major fall of the euro against the US dollar, breaking the record minimum level of December. Later the dollar returned to almost the daily opening level. However, due to the weekly opening break, the euro level still is lower against the dollar in relation to Friday’s latest level.

As a result of the deterioration in the banking sector and due to the worsening situation of the entire economy, the euro crushed the pound (as the only major currency). It appears that currency dealers already determined their priorities concerning the major currencies– from the securest to the most risky: the pound follows after the yen, the dollar and the euro.

Analysts expect tomorrow’s report on Euro zone December PPI to result in a major decline of the inflation in the region. This could be a sign of deflation through which the ECB would consider to lower interest rate and this would result in a decline of the euro against the dollar, close to 1.24.