May 24, 2012 -- Updated 0211 GMT (1011 HKT)
Euro notes are pictured coming out of an ATM machine on June 22, 2011 in Athens, Greece
(Financial Times) -- The euro tumbled to its lowest level in almost two years as investors dumped riskier European equities amid signs that policymakers were bracing for the financial turmoil that could be unleashed by a Greek exit from the eurozone.
The single currency fell
about a percentage point during European trading to its weakest level
since the summer of 2010 as European leaders gathered in Brussels for an
informal summit.
In a sign of how
seriously eurozone countries are taking the possibility of a Greek exit
from the single currency, it emerged that senior eurozone finance
ministry officials had held a conference call on Monday during which
each country was asked to detail the contingency planning their
treasuries had done to prepare for a Greek departure.
European stock markets
suffered their worst one-day drop in a month, while investors fled the
riskier sovereign debt of the eurozone's periphery and piled into haven
assets such as the government debt of the US, the UK and Germany.
"It looks like real
panic, but it could get worse," said Christopher Iggo, chief investment
officer for fixed income at Axa Investment Managers. "We could see real
capitulation unless policymakers act decisively and massively."
The turmoil pushed
Germany's 30-year bond yield below 2 per cent for the first time, even
as the borrowing costs of Europe's more embattled countries shot up,
underlining the severe strains in the continent's financial system.
The worries about the
eurozone triggered sharp falls in oil and commodities markets. Brent
crude, the global benchmark, hit its lowest level so far this year,
falling to $105 a barrel.
The Bundesbank, Germany's
central bank, said in a firmly worded monthly report that it viewed as
unacceptable any relaxation of the terms of Greece's bailout -- as a
majority of Greek voters had effectively demanded by backing parties
that wanted revisions to those terms. The eurozone could manage the
impact of a Greek exit, the Bundesbank said.
Taking an assertive line
in Paris ahead of his first EU summit, François Hollande, France's new
president, said he wanted eurozone leaders to discuss the role of the
European Central Bank in providing further liquidity to banks and
intervening in sovereign debt markets.
The sharp falls in the
euro prompted calls that the single currency had finally cracked under
the pressure of growing concerns over Greece's membership in the
eurozone.
"Whatever the reasons it
has held up so far, the euro does now finally seem to be crumbling,"
said Julian Jessop, chief global economist at London-based Capital
Economics.
Asset managers and
pension funds were on Wednesday cutting their euro exposure and moving
into dollars, according to Citigroup. BNY Mellon said that appetite
among its clients this week for the US dollar was twice as high as
average over the past year.
G249X, German bonds
European importers
caught short by the drop in the euro were scrambling to hedge their
currency exposure, according to investment banks. The single currency
barely moved against the dollar for the first quarter of the year,
leading many companies to reduce their normal currency hedging activity.
"People have been caught
by surprise," said Gerald Dannhaeuser, global head of foreign currency
sales at Commerzbank. "Companies that need to hedge against a stronger
dollar are more concerned now."
The relative strength of
the euro in the face of escalating concerns over the eurozone debt
crisis has puzzled companies and investors. The single currency rose 3
per cent against the US dollar in the first quarter of the year. But
since the Greek elections on May 6, the euro has lost 4 per cent. By the
close of London trading on Wednesday, the euro had fallen one per cent
to $1.2544.
Additional reporting by Javier Blas in London
