Forexpros – The euro slid against the dollar Wednesday, as reports out of Germany that Chancellor Angela Merkel’s government opposed increasing the size of the European Stability Mechanism, a EUR500 billion rescue fund, rattled nerves.
Furthermore, the Federal Reserve said the U.S. economy remains susceptible to external shocks, language the market interpreted to mean that the world’s largest economy will stay vulnerable to a European crisis that Washington sees raging on next year, sending the euro to an 11-month low in U.S. trading.
EUR/USD hit 1.3035 during early Asian trading, down 0.02% after dipping briefly to 1.3016 and off from a session high of 1.3042.
The pair was likely to find support at 1.3010 today’s low, and resistance at 1.3238, Tuesday’s high.
In 2012, E.U. nations will be able to tap the EUR500 billion European Stability Mechanism for emergencies, and despite long-running fears the fund isn’t big enough, a key contributor, Germany, reportedly rebuffed calls to allocate more money into it.
Furthermore, the U.S. Federal Reserve left its benchmark interest rate unchanged at 0.25% and hinted European turmoil continues to threaten U.S. economic activity.
“Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate,” the Fed said in a statement.
Talk that inflation coming in lower than expected could be interpreted as the Fed leaving the door open to a third round of quantitative easing – asset purchases from banks – although market watchers said such policies won’t come until well into 2012 if they come at all, which was bullish for the dollar.
“The quick take-away from the Fed statement is that there seems to be less chances of quantitative easing,” said Tommy Molloy, chief dealer at FX Solutions at Saddle River, New Jersey, according to Reuters.
“Essentially what the Fed is saying is that the rest of the world is garbage and the United States is not doing so badly.”
Furthermore, German refusal to bolster emergency funds even before those funds come into existence supported growing market sentiment that the European Central Bank must consider rescuing the eurozone by buying up sovereign bonds issued by debt-ridden countries like Greece or Italy.
So far, the European Central Bank has refused to do so on the grounds that it would threaten inflation rates and also on the belief that central bankers believe it’s up to politicians now to undertake politically unpopular austerity measures instead of repeating calls for a lender of last resort to save the day.
Meanwhile in the U.S. retail sales rose 0.2% in November, the sixth straight monthly increase, and while still below consensus for a 0.6% gain, markets took the news as positive nonetheless.
The euro, meanwhile, was down slightly against the pound, with EUR/GBP dipping 0.07% to trade at 0.8416.
Later Wednesday, the United Kingdom will release its Claimant Count Change, which measures the change in the number of unemployed people in the U.K., as well as its overall jobless percentage rate.
The United States will unveil its latest import price index, which measures the change in the price of imported goods and services purchased domestically, as well as weekly crude and gasoline inventories.
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