The euro fell to a two-month low versus the dollar and a record trough against the Swiss franc on Monday, as investors unwound bullish bets on mounting worries about the region's debt with many expecting more losses. The euro fell to as low $1.3968 on trading platform EBS, its weakest since mid-March, on doubts about Spanish austerity measures after Madrid's ruling Socialist party was defeated in regional elections, while Italy suffered a credit outlook downgrade and speculation mounted over some sort of Greek debt restructuring.
The single currency was last down 1 percent at $1.4010, having broken support at $1.40, a key psychological level which was also its 200-week moving average. Its rout was stopped by bids from Asian central banks at around $1.3965, the 100-day moving average which offered another support level. Traders cited stop-losses building below that level while pricing in the options market suggested the risks for the euro were more towards the downside.
"The euro breaking past the big $1.40 level saw stops being triggered which added to its losses," said Ankita Dudani, G10 currency strategist at RBS Global Banking. "The developments in Spain have now come to the radar in addition to the problems already facing Greece. Also, the PMI numbers have been soft." Weaker economic data added to the euro's woes as German and euro zone purchasing managers' indexes (PMIs) for May fell more than expected.
While the latest batch of bad news did little to change the fundamental outlook for the euro zone, analysts said it had offered a chance for speculators to wind back their short positions in the dollar, which remain high. "(Today's euro selling) is a short-term reallocation into the dollar. People are moving assets to the US because they think growth there may outperform the eurozone," said Geoffrey Yu, currency strategist at UBS.
The euro fell to 1.2323 Swiss francs, its lowest since the single currency was launched in 1999. Selling accelerated during the Asian session after stop-loss orders were triggered below 1.24, while an option barrier was taken out at 1.2350.
The euro's move led to a jump in one-month implied volatility to around 13.1 percent, much higher than 11.45 percent on Friday and suggesting that trading may get even more erratic if euro selling continues in the near term. One-month euro/dollar risk reversals shot up to 1.8 from 1.5 in favour of euro puts. The rising premium required to protect against more euro selling suggests that the euro could fall even more.
The dollar was a big beneficiary of euro losses, rising to a seven-week high of 76.366 versus a currency basket. Euro selling pressure grew after spreads on benchmark Spanish, Italian and Greek government bonds widened against German benchmarks as investors dumped the bonds of weaker eurozone countries in favour of safer German debt.