The euro was generally weaker on Thursday after a ratings downgrade on Spanish debt intensified concerns that officials will be able to balance inflationary pressures with the need to prop up badly damaged economies on Europe’s periphery.
The region’s simmering debt problems have bubbled back up to the surface this week. Moody’s downgraded Greece a few days ago, and dropped the hammer on Spain this morning, citing concerns about Madrid’s ability to hit budget targets.
Meanwhile, yesterday’s Portuguese bond auction went off as expected, with the country paying a heavy premium to attract investors. Portugal’s high borrowing costs are likely to be unsustainable, and have raised speculation a bailout is in the cards.
European officials have called a special meeting to discuss the debt crisis on Friday.
Central bankers are in a pickle, tasked with warding off inflation despite concerns about anemic growth.
Risks to price stability are on the upside and this clearly warrants “strong vigilance,” the European Central Bank said in its latest monthly bulletin released Thursday.
“It is essential that the recent rise in inflation does not give rise to broad-based inflationary pressures over the medium term,” ECB noted in the bulletin’s editorial.
The euro dropped to a weekly low of $1.3795 versus the dollar, having touched a 4-month high of $1.4035 back on Monday.
At the same time, single currency snapped back from early losses against the sterling, improving to GBP 0.8593 from near 0.8950.
The Bank of England left its key interest rate unchanged at a record low again and maintained the size of the quantitative easing at GBP 200 billion.
The BoE move was widely expected, but some predicted they would scale back their asset purchase program.
The euro eased a bit versus the yen, falling slightly below an unusually narrow trading range to hit a weekly low of Y114.30.
In economic news from around the globe, U.K. industrial production recorded a monthly growth of 0.5 percent in January, down slightly from December’s 0.6 percent increase, the Office for National Statistics said on Thursday. The consensus forecast called for a 0.4 percent rise.
After falling to their lowest level in nearly three years in the previous week, first-time claims for unemployment benefits in the U.S. rebounded by more than expected in the week ended March 5th, according to a report released by the Labor Department on Thursday.
The report showed that initial jobless claims rose by 26,000 to 397,000 from the previous week’s revised figure of 371,000.