The euro fell against the US dollar for a second straight session on Monday as budget problems in Ireland and eurozone debt issues prompted investors to seek safety in the greenback. The euro, which fell Friday after a stronger-than-expected US jobs report, extended losses Monday on Europe's sovereign debt concerns.
The dollar had slipped to a 9-1/2-month low against the euro after the Federal Reserve last Wednesday said it would buy $600 billion of Treasuries by mid-2011 to lower interest rates and reinvigorate a sluggish economy. The euro was last down 0.8 percent at $1.3917, and traders said a break through support around $1.3860, its low so far this month, could trigger a near-term move toward $1.37. It also fell 0.9 percent to 112.95 yen.
"Fears are escalating over sovereign debt issues in the eurozone, and the euro breaking below $1.40 is a substantial move," said Camilla Sutton, currency strategist at Scotia Capital in Toronto, Canada. "Having said that, I believe the euro's weakness is only a temporary move and we will revert back to dollar weakness," she said. Fed easing "will continue to put downward pressure on the dollar into the year end as well as next year."
The shape of the US Treasury yield curve, meanwhile, is depicting concern over long-term US dollar value, Sutton added. The US Treasury yield curve steepened to record levels early on Monday amid continued fallout from the Federal Reserve's plan to extend its bond buying program.
But profit-taking eventually turned longer-dated debt prices positive and narrowed the yield gap between long bonds and 10-year Treasury notes. The steepness of the yield curve speaks to the longer-term risks inherent in Fed easing and the building unattractiveness of US dollar denominated assets, she said.
For now, though, markets were focused on debt problems in Ireland. Although the government is funded until early 2011, an Irish newspaper report questioned the government's ability to cut spending next year, casting doubt on future demand for Irish debt. The cost of protecting Irish government debt against default rose on Monday as did equivalent insurance for Spain.
China said over the weekend it would help Portugal, another eurozone country with strained public finances, cope with the crisis, but made no promises about buying Portuguese government bonds. China has promised to buy Greek bonds in the future.
Weak German industrial output data also hurt the euro, while a general move away from risk weakened the Australian dollar, which fell 0.3 percent to $1.0129, off Friday's 28-year peak of $1.0183. The New Zealand dollar fell 1.1 percent to $0.7876. The US dollar was last down 0.1 percent at 81.16 yen. Beyond short-covering, the dollar faces an uphill climb against most major currencies and emerging market currencies.
While recent jobs data was surprisingly strong, analysts said the economy has yet to show it can sustain such strength. Sutton expects the euro to reach $1.43 at year-end. The Fed's decision to pump more money into the US economy has certainly irked developing and some developed countries who fear the money will stoke inflation outside US borders. Germany's finance minister called US monetary policy "clueless." The issue will probably feature at a Group of 20 meeting in Seoul this week that may address global economic imbalances.