LONDON — Signs of increasing euro zone economic gloom and rising public hostility towards austerity policies ahead of two elections kept the single currency weak yesterday and European shares snapped a four-day rally.
But trading was light ahead of May Day holidays across Europe, elections in France and Greece at the weekend and the European Central Bank meeting today when policymakers will have to consider the region's worsening economic health.
"Market stresses have re-emerged in the euro area on concerns that deficit reduction targets may be sabotaged by a return to recession," said Sarah Hewin, senior economist for Europe at Standard Chartered Bank.
Disappointing 2.2 per cent first quarter growth in the United States also renewed hopes the Federal Reserve will consider further policy easing before its current programme of support to the financial markets ends in June.
"The weaker-than-expected US GDP report has re-heightened speculation over the prospect of further monetary stimulus from the Fed, weighing upon the dollar," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ, Ltd.
In the foreign exchange markets, speculation about the Fed pushed the dollar to a two-month low against a basket of currencies of 78.64 before it recovered to be little changed at 78.76.
The euro meanwhile fell to a two-week low against the yen but was mostly steady against the softer US unit at around the $1.3245 mark.
Spain, the euro zone's fourth largest economy, added to evidence of the region's worsening outlook by reporting its economy had slipped into recession, joining a growing list of countries that includes Italy, Portugal, Ireland, Greece, Belgium and Holland.
Growing opposition to austerity is expected to be a large factor in weekend elections in France and Greece which could add to pressure to find ways to stimulate growth across the region.
On Sunday, thousands of Spaniards angered by government cuts that have helped send unemployment up to nearly 25 per cent took part in protests across country.
Fresh European Central Bank data yesterday showed loans to euro zone households and firms grew more slowly than expected in March, as banks continued to reduce lending. — Reuters