LONDON: The euro slipped to a session low versus the dollar on Friday on doubts about the firepower of a strengthened euro zone bailout fund, leaving it on track for its biggest monthly loss in ten months.
Month-end demand boosted the dollar as market participants said non-US fund managers needed to buy the currency after a sell-off in equity markets this month required them to cut back their dollar hedging positions.
Comments from Germany's economy minister that its lower parliamentary house did not seem willing to approve higher limits for the EFSF bailout fund knocked the euro to the day's low of $1.3488, relinquishing gains made on Thursday when lawmaker voted to approve a beefing-up of the fund.
Sentiment towards the euro remains negative as many investors are still betting on a Greek debt default, while demanding more measures to prevent Athens's debt problems from spreading to other countries.
"It could be that month-end demand for USD is the main cause of the euro's sogginess, though the German vote by no means solves all of Europe's problems," CitiFX Wire analysts said in a note.
The euro fell 0.7 percent on the day, but selling petered out ahead of $1.3480, as traders suspected big stop-loss sell orders below that level.
The dollar rose versus a currency basket, lifting its trade-weighted index 0.3 percent to 78.255 .
Market participants saw a need for investors to buy dollars against the yen, sterling and the Australian and Canadian currencies later in the day for month-end adjustment purposes.
The dollar traded 0.2 percent lower at 76.70 yen, but it pulled away from a session low of 76.49 hit in Asian trade, where traders in Tokyo had cited selling by Japanese exporters.
Investors took in their stride comments by Japanese Finance Minister Jun Azumi, who said Japan will boost its currency intervention fund by 15 trillion yen ($195 billion) through a third extra budget for the fiscal year to next March.
The New Zealand dollar fell roughly 1 percent on the day to a six-month low of US$0.7627 after Standard & Poor's followed Fitch Ratings in downgrading the country's sovereign debt by one notch.
BAD MONTH FOR EURO
The euro is poised to end September 6 percent lower against the dollar, its worst monthly performance since November.
Jitters over the spiralling European debt crisis, European banks' exposure to sovereign debt and a slowing global economy caused investors to slash their bets on risky assets in the July-September quarter, sending the common currency down almost 10 cents versus the dollar over the period.
Euro zone finance ministers meet next week to discuss more ways to help Greece, but few in the market are expecting aggressive measures to ring-fence other countries should Athens default on its debts.
"We don't expect any concrete decisions from next week's Eurogroup meeting. But we could get a positive statement that policymakers will help the euro zone periphery, which could help sentiment," said You-Na Park, currency strategist at Commerzbank in Frankfurt.
She said any euro gains on such optimism would likely be capped around $1.37.
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