Fiscal worries drive euro lower

London : The euro hit a seven-month low against the dollar yesterday as concerns intensified that Greece's fiscal problems would spread to other highly-indebted euro zone countries, while European stocks followed Asia lower.

Investors are looking to monetary policy decisions by the Bank of England (BoE) and the European Central Bank. The BoE looks set to halt its government bond buying programme, taking the first step towards normalising policy, but both of them are expected to emphasise that interest rates would stay low for some time.

The premium investors demand to hold government debt issued by peripheral countries such as Greece, Portugal and Spain rather than benchmark German bunds (German federal government bonds) rose again. The cost of insuring Portuguese debt against default hit a record high.

The euro zone is dealing with a most severe debt crisis and the European Union said Greek plans to cut the budget gap from 12.7 per cent of gross domestic product in 2009 to below 3 per cent in 2012 would not be easy to implement.

The euro fell around 0.4 per cent on the day to $1.3831, its lowest since early July.

The 10-year Portuguese/German government bond yield spread widened nine basis points on the day to 154 basis points. The equivalent Greek spread widened 12 basis points to 360 bps while the Spanish spread edged out to 93 bps from 91 bps.

Portugal added to investor jitters on Wednesday after it cut its planned Treasury bill placement because yields spiked from January's placement on Greek concerns.

Portuguese five-year credit default swaps hit a record high of 216 basis points from 196.2 bps late on Wednesday. This means it costs 216,000 euros per 10 million euros of exposure. Greek and Spanish five-year CDS also rose.

MSCI world equity index fell 0.4 per cent while the FTSEurofirst 300 index lost 0.3 per cent. Shell fell more than 2 per cent after it posted a 75 per cent fall in fourth-quarter profits to $1.18 billion due to falling output.

Japanese stocks fell 0.5 per cent with Toyota Motor sliding further on its recall woes. Emerging stocks dropped 0.8 per cent.