The euro fell against the dollar on Wednesday on disappointment at a delay in increasing a euro zone bailout fund and on wariness before a Portuguese vote on austerity measures. Having failed to take out options barriers at $1.4250, the euro was down around a cent from a four and a half month high of $1.4249 on Tuesday and heading towards reported stop loss orders below $1.4140.
A document showed eurozone states will take a decision on how to increase the effective capacity of their bailout fund only by the end of June, not at a summit this week, draft conclusions prepared for the summit showed. "This is another euro-negative piece of news - countries could struggle to sell this (increased participation) at home," said a London-based head of FX sales.
The euro was down 0.3 percent at $1.4150, having hit a low for the session of $1.4140, according to Reuters data, though expectations of higher eurozone interest rates were expected to cap falls. Traders were also wary ahead of a vote in Portugal on austerity measures that could fail, setting the stage for a possible collapse of the minority Socialist government.
"Euro/dollar will be sensitive to news coming from Portugal and the rising possibility that Prime Minister Socrates is forced to resign," said Roberto Mialich, currency strategist at Unicredit in Milan. "This will put the debt crisis story back under the spotlight, the day before the EU leaders meeting tomorrow. But (a likely) ECB rate hike in April should contain the negative news for the euro," he said, adding that the euro is unlikely to go any lower than $1.4050.
Sterling was also under pressure, falling 0.6 percent to $1.6277, with traders saying some were disappointed that Bank of England minutes were no more hawkish than last month. The UK budget was also in focus. UK finance minister George Osborne has billed the 2011/12 budget as one for growth, but analysts are unsure how much he can do given a drive to bring public finances under control.
The prospect of higher interest rates, combined with a sense that there is a will among European policymakers to resolve the eurozone debt crisis was expected to keep the euro supported well above $1.40, however. In another signal that interest rates could rise next month, European Central Bank executive board member Lorenzo Bini Smaghi warned keeping rates very low amounted to an expansionary policy that risked spurring excessive risk-taking.
Other cues for traders could include continued tensions in Libya and the Middle East. Against a backdrop of uncertainty and broad aversion to taking on risk the Swiss franc was stronger, as was the yen. The euro was down 0.4 percent at 114.59 yen and down 0.6 percent at 1.2746 Swiss francs, while the dollar also lost 0.3 percent to 0.9008 francs. Market participants were wary, however, of Japanese authorities returning to sell the yen aggressively, particularly below 80.50 yen per dollar, where they came in last Friday.