The EUR fell sharply as concerns over European sovereign debt pressured the currency. Economists focused on the budget deficits for the nations of Greece, Portugal, and Spain. Investors sold off riskier assets in general with the EUR being hit particularly hard. The EUR/USD fell at one point to a 12-month low.
Some investors are anticipating a potential default on sovereign debt payments, or a possible bailout by the European Central Bank (ECB). The President of the ECB, Jean-Claude Trichet, said no new steps would be taken at this time by the bank to aid the struggling nations. A last resort could be rescue loans by the International Monetary Fund. However, this could bring with it tough economic requirements as conditions of acceptance, creating uncomfortable social ills for the accepting nations.
An expectation of a potential bailout of the struggling nations has eliminated much of the demand for the EUR. This could also eliminate any potential economic growth the Euro-Zone economy was expected to produce this year. This could further hurt the EUR against the dollar as the U.S. may begin raising interest rates well before the ECB begins tightening monetary policy, creating an interest rate differential that traders may exploit.