LONDON - European stock markets and the euro made a morose start to the year on Friday, with the single currency sinking to four-year lows in response to fears of deflation.
The euro was hit by comments from ECB chief Mario Draghi, who said the risk of deflation in the eurozone was not excluded and that preparations were under way to ward off an onset of tumbling prices.
Europe's main indices ended the week firmly in the red, with London's benchmark FTSE 100 index losing 0.28 percent to 6,547.80 points compared with the close on Wednesday.
Frankfurt's DAX 30 declined 0.42 percent to 9,764.73 points and the CAC 40 in Paris slumped 0.48 percent to 4,252.29 points.
The markets were trading weak all day and only briefly turned positive when Wall Street opened in positive territory. But both Dow Jones and Nasdaq later reversed the trend and began sliding over lacklustre reports on US construction spending and manufacturing activity.
European markets, which had been shut Thursday, had steadied overall in 2014 compared with the previous year as companies balanced sluggish regional growth alongside low inflation and interest rates.
Borrowing rates in France, Spain and Italy meanwhile fell to historic lows in thin holiday trading, as investors were expecting the European Central Bank to start buying sovereign bonds to fight the threat of deflation.
- Euro woes -
In foreign exchange deals on Friday, the euro took a hammering after Draghi's comments, while the dollar extended gains ahead of the release of US factory data and following a steady stream of good news from the world's biggest economy.
Europe's single currency weakened to $1.2018, down from $1.2097 on Wednesday.
Draghi's dulcet dovish QE-tones were bad news for the euro, which already had a dominant dollar to contend with, said Connor Campbell, analyst at Spreadex traders.
While speculation reignited that Greece could exit the eurozone, Lithuania welcomed a New Year and a new currency on Thursday, becoming the last Baltic nation to adopt the euro in a bid to boost stability despite fears of inflation and eurozone debt woes.
Greece's parliament was dissolved Wednesday ahead of an early election watched warily by markets and international creditors concerned that the austerity-weary country could start unwinding unpopular fiscal reforms.
Prime Minister Antonis Samaras has warned that his financially-stricken nation may be forced out of the eurozone if the election is won by the radical leftist party Syriza which has vowed to reverse years of austerity imposed in return for financial aid.
This month is already looking particularly important as a possible road map for the year ahead, with expectations high surrounding some form of European QE and the results of a Greek general election both due before the end of the month, said IG trading group analyst Alastair McCaig.
Fears that a considerably more anti-austerity party will take over from Prime Minister Antonis Samaras and disrupt the fragile stability that currently exists around Europe look to be giving investors a more cautious trading mind set.
AFP
