Euro sinks after German firms’ morale worsens

 
Julian Harris
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EURO

EURO tumbled against the dollar yesterday after a widely regarded measure of business confidence suggested that the single currency’s largest economy could be heading for recession.

Germany’s Ifo Institute revealed that its latest business climate index declined for the fifth straight month in September. Coming in at 101.4, down from 102.3 in August, the headline index sunk to its lowest level since early 2010.

The score is still above its long term average, yet the decline is worrying as it suggests that the Eurozone’s powerhouse economy could be failing to prop up its other struggling states.

“While Germany might have avoided a recession in quarter three, it seems like only a matter of time before the economy starts to contract,” commented Jennifer McKeown of Capital Economics.

“This will make support for the peripheral economies even more difficult to muster.”

The euro sank over half a per cent during trading following the report, touching a low of $1.2894. It recovered slightly later in the day but was still anchored at $1.2930 last night.

The dip in confidence may be more related to fast-changing political events in the Eurozone rather than deteriorating business fundamentals, however. “The second half of responses handed in after the (positive) decision of the German Constitutional Court regarding the ESM and Fiscal Pact on 12 September were more upbeat than the earlier ones,” said Timo Klein of IHS Global Insight.

The data is nonetheless bad news for German Chancellor Angela Merkel, who faces a fight to hold off challengers to her position during next year’s general election.