The euro traded near four-year lows Monday amid warnings from European leaders that their $1 trillion loan backstop for troubled governments would not be enough to defuse the continent's crisis over high levels of government debt.
The euro was trading 0.1 percent lower on the day at $1.2334 as finance ministers from the EU gather in Brussels to try to restore confidence that the 16 countries that use the currency were ready to take the tough measures needed to reduce their debt burdens.
Earlier euro had fallen to $1.2237 - its lowest since April 2006. The shared currency has now fallen a staggering 12 percent over the past week in spite of the massive euro750 billion 'shock and awe' financial rescue package unveiled last weekend from the EU, together with the International Monetary Fund.
The slide comes as Europe's leaders are saying that the loan backstop by itself isn't enough and that goverments must take drastic steps to get debt under control - and shore up the fundamental rules that govern their 11-year-old currency by preventing governments from spending their way into trouble and needing a bailout like the one just given Greece. Such rules exist but have been widely ignored and officials are looking at toughening them.
German Chancellor Angela Merkel conceded over the weekend that package was no more than a band-aid solution to the problems afflicting a number of eurozone countries, from Ireland all the way across to Greece.
The solution, according to Merkel, is greater cooperation in financial and economic policy across Europe to ensure the currency's long-term stability. She has advocated tighter rules on debt and even tossing violators out of the euro.
"This week has started with the news that the German government will press other eurozone countries to follow its example in setting rules for balancing budgets within its regions," said Jane Foley, research director at Forex.com.
"However, this is unlikely to fundamentally alter sentiment with respect to the euro given broad based skepticism about the ability of Greece to stomach the budget reform already on the table," said Foley.
European Central Bank President Jean-Claude Trichet echoed Merkel when he told German newspaper Der Spiegel that the package "bought time, nothing more" and that there is now a need for "a quantum leap in the governance of the euro area."
The package - on top of an earlier euro110 billion bailout of Greece - appears to have calmed fears of immediate disaster - such as a wave of debt defaults across the 16-country eurozone - but longer term issues remain.
In particular, investors remain highly skeptical about the ability of Europe's governments, Greece's in particular, to push through the austerity measures promised in the face of likely political and social unrest. And even if they do, there are fears the cutbacks will kill off growth - and make it even harder to pay government debt.
"The severe nature of the austerity measures being imposed on countries in exchange for bailout cash has caused a crisis of confidence about future growth levels, and could well precipitate the debt defaults it was designed to avoid," said Michael Hewson, an analyst at CMC Markets.
This skepticism has been evident across the financial system. While the euro has dropped sharply, interbank lending rates have spiked higher amid concerns that the debt crisis will prove to another headache for the banking sector. Gold is back in demand as investors seek sanctuary in this traditional safe haven asset - on Friday, gold prices struck a new record high of $1,249.40 an ounce.
The euro's slide by itself is not all bad. It makes European exports cheaper outside the eurozone and so could help spur the weak economy.
Alongside these fears, investors remain worried that the European Central Bank's independence has been tarnished by the news that has agreed to buy government bonds in the secondary markets to maintain liquidity and keep yields low. Just ten days ago at the monthly rate-setting meeting, Trichet had said the issue had not even been discussed.
The bank has been at pains to say the measure will not increase the supply of money in the economy - a potentially inflationary move.
The euro's slide has been propelled by predictions the bank will wait even longer before raising its key interest rate , now at a record low of 1 percent. Those low rates can weigh on the euro's exchange rate by reducing return on euro-denominated investments - especially if rates go up first in the United States as its economy recovers. UniCredit economists have moved their forecast for the first ECB rate hike from March 2011 to the fourth quarter of that year.
This program aired on May 17, 2010. The audio for this program is not available.