A bank employee counts Euro notes in London. Europe’s single currency weakened to $1.2018 yesterday, down from $1.2097 on Wednesday.

AFP/London

European stock markets and the euro made a morose start to the year yesterday, 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% to 6,547.80 points compared with the close on Wednesday.

Frankfurt’s DAX 30 declined 0.42% to 9,764.73 points and the CAC 40 in Paris slumped 0.48% 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 on 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.

In foreign exchange deals yesterday, 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 on 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.

“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.