The euro hit a two-month low against the dollar on Tuesday, with the outlook clouded by uncertainty over a parliamentary vote in Greece and the risk of a deep economic slowdown in the euro zone. Investors also headed for the safe-havens of the dollar and the yen ahead of the result of Tuesday's US presidential election, which looked too close to call.
Opinion polls showed incumbent Barack Obama and Republican challenger Mitt Romney in a dead heat, although the president has a slight advantage in several swing states.
The euro was flat on the day at $1.2795, having dropped to $1.27635 on trading platform EBS, its lowest level in two months earlier in the European session.
That was well below its September 17 high of $1.31729 struck after the European Central Bank pledged to buy government bonds of struggling euro zone countries that requested help.
Traders said investors were adding to short positions against the euro and looking to sell at higher levels after weak euro zone PMI data bore grim tidings for the fourth quarter and German industrial orders slumped in September.
Immediate support is seen around $1.2741, the 38.2 percent retracement of the euro's July to September rally.
"The PMIs and German orders are very much on the weak side and the weakness in the euro zone will keep the euro under pressure," said Steven Saywell, European head of FX strategy at BNP Paribas. "In particular there are some other currency pairs that will outpace the euro including the Aussie dollar, New Zealand dollar and the (British) pound."
The euro fell to an eight-week low against the high-yielding Australian dollar at A$1.2244, while it plumbed a one-month low against the British pound as investors grew jittery about whether Greece's parliament can pass a reform package.
Parliament will approve or reject the package of measures, including cost cuts and tax hikes amounting to 13.5 billion euros ($17 billion) by 2016, on Wednesday.
Approval of the reforms and the passage of the 2013 budget are crucial to unlocking 31.5 billion euros in aid from an IMF/ EU bailout that has been on hold for months. "We are seeing investors getting disillusioned about the euro zone, the positive factor from the ECB's plan to buy bonds is fading and that is fundamentally weighing on the euro," said Neil Mellor, currency strategist at Bank of New York Mellon.
The dollar index edged lower to 80.67, but was not far off its two-month high of 80.843.
With the Republicans seen retaining control of the US House of Representatives, a victory for Obama would be seen as raising the risk of policy paralysis over the country's so-called 'fiscal cliff'. If Congress cannot agree new arrangements, about $600 billion in government spending cuts and higher taxes will kick in early next year, all of which could hurt US economic growth and underpin safe-haven assets.
"The key outcome to the election will be the issue of the fiscal cliff which will need a significant mandate to deal with," Saywell said, expecting a win for incumbent Barack Obama.
The dollar underperformed the yen, however, falling 0.2 percent to 80.16 yen, and well below a six-month high of 80.68 yen hit on Friday. Traders said investors cut long dollar positions built up earlier. The Australian dollar climbed after Australia's central bank decided against a rate cut and kept its benchmark rate at 3.25 percent, citing higher inflation and an improved global background, although it still left the door open to more stimulus if needed.
The decision came as a surprise to some market players. The Australian dollar rose 0.8 percent to a near six-week high of $1.0440.
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