The EUR fell again against the USD yesterday, reaching the lowest level since 21 November. At about 16.15 yesterday it fell to 1.2513 USD. This was a result of concerns on the Forex about the impact on the Euro Zone of the difficulties of the Eastern European economies.

The severity of the problems being experienced by the Eastern Europe currencies has long reaching effects. The situation raises fears not only for the European financial sector but also for the potential increase in the depth of the recession in the Euro Zone. Some analysts speculate that the EUR could fall to under 1.20 USD in the medium term because the European Central Bank may be forced to reduce its interest rate to under 2% which in turn reduces the gap between the Euro Zone and the United States where the interest rate is already set to almost zero.

The European Commission expressed its concern about the volatility of the Eastern European currencies, many of which have fallen sharply. Since Monday the Hungarian forint, the Czech koruna, the Polish zloty and the Romanian leu have experienced severe volatility because of the concerns about the state of the banks in these countries and fears that there will be a large withdrawal of capital.

The banks of Western Europe are exposed by the state of their subsidiaries in Eastern Europe. The risk is that the markets will develope a vicious cycle while the economies of Eastern Europe adjust to their instability by recalling their funds from Western banks. It may be that France and Germany will have to support some countries in Central and Eastern Europe because of the extent of their exposure in the region.

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