The dollar surged to seven-month highs against the euro on Tuesday as investors braced for a vote against the European Union constitution in the Netherlands after a similar measure was rejected in France, worsening the prospects for European economic reform. The euro slid 1.3 percent against the dollar from levels late Friday, on track for its largest one-day decline since early January.
Against the strengthening US currency, the euro fell to $1.2297 in the New York session, piercing major support around $1.2450 and technical barriers at $1.23, according to Reuters data.
"The weekend 'No' vote (in France) was deemed to be negative for the euro and has sent the euro/dollar into a new trading range," said Michael Woolfolk, senior currency strategist with the Bank of New York. "It is quite possible that in the coming weeks we could get as low as $1.20 before the market decides that it has bought enough dollars for the time being."
Analysts say the euro zone needs deep reforms because of its anemic growth and low confidence. But the French vote underscored voters' distrust of a reform drive that could limit social protection.
Vitor Constancio, a member of the European Central Bank, told Reuters the euro's decline following the French referendum will likely be corrected through economic fundamentals.
Voters in the Netherlands were likely to deal another blow to the European constitution's prospects on Wednesday. Polls show the "No" camp is likely to gain 60 percent of the votes.
Aziz McMahon, currency strategist with ABN Amro in New York, said the euro's decline was significant since larger institutional accounts were joining short-term speculators in selling off the euro.
"To see an acceleration of a move lower suggests that what's happening is you've seen mainly spec selling above the $1.25 area but now longer-term long positions in euro/dollar are being taken off," he said.
In the currency options market, traders pushed up implied volatility of 1-month euro/dollar contracts to a 3-month high as the euro entered a new range for the year in the spot market. Bids on volatility of contracts lasting through this week, which includes the Dutch referendum and the next US payrolls report, spiked to four-month highs.
According to data provided by GFI, a New York brokerage, the options market expects the euro to be confined within a range of roughly $1.22 to $1.2456 in the next month.
Against the yen, the dollar traded at a 1-1/2 month high of 108.53 yen, up nearly a half percent from late Monday.
Earlier, the euro hit a four-month low against the yen around 133.07 yen, down almost 1 percent.
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