The euro was under pressure yesterday on concerns the eurozone debt crisis could take another dangerous turn if, as seemed increasingly likely, the Portuguese government falls.
Dealers said Portugal, widely considered the next eurozone member state to need a bailout after Greece and Ireland last year, seemed to be reaching the point of no-return, with the government set to lose a vote later yesterday on its economic policies.
Having slashed spending and hiked taxes to try and balance the public finances, the government is increasingly unpopular and the opposition has called a vote with the aim of ousting it from office.
Up to now, the main opposition party has abstained on the various austerity packages introduced by the government, allowing them to get through.
The minority government of Socialist Premier José Socrates has warned that if the vote goes against it, then Portugal will very likely be unable to raise fresh funds on the markets and will have no option but to seek outside help.
In late London trade, the euro fell to $1.4129 from $1.4197 in New York yesterday while the dollar slipped to 80.83 yen from 80.98 yen.
The pound sterling fell to $1.6255 from $1.6367 after the British government cut this year’s growth forecast to 1.7 per cent from 2.1 per cent.
“Portugal’s precarious financial situation means that a political crisis could not come at a worse time,” said Kathleen Brooks at Forex.com.
“If these reforms don’t get passed then Portugal will be pushed even closer to a bailout, something it has just about managed to avoid,” she said.
“But while a bailout of Portugal by itself wouldn’t be enough to spook the markets, it could derail the EU summit (today and tomorrow)” which is supposed to agree on a permanent eurozone debt rescue mechanism, she added.
Analysts said events in Portugal come at a bad time, threatening to undercut the EU summit and stoke the eurozone debt crisis afresh against a very disturbed global backdrop of unrest across the Middle East and Japan’s nuclear crisis.
The pound hit a 14-month high of $1.6393 on Tuesday as surging inflation stoked expectations of an interest rate hike some time soon.
British annual inflation jumped to 4.4 per cent in February, the highest level for more than two years, driven by soaring energy and clothing costs, and well above the two per cent target, official data showed.
In London trade late yesterday, the euro changed hands at $1.4129 against $1.4197 in New York late on Tuesday, at 114.21 yen (114.98), £0.8691 (0.8674) and 1.2824 Swiss francs (1.2824).
The dollar stood at 80.83 yen (80.98) and 0.9078 Swiss francs (0.9032). The pound was at $1.6255 (1.6367).
On the London Bullion Market, the price of gold firmed to $1,439.50 an ounce from $1,426 late on Tuesday.