The euro hit a record low against the Swiss franc on Wednesday as investors fretted about Greece's ability to repay its debts, and traders said it was likely to fall further against the US dollar this week. Investors fear Athens, which is digging its way out from under massive debt, will struggle to implement more austerity measures, given stiff political opposition.
That raises the prospect of Greece having to restructure its outstanding debt, which traders said should push the euro below $1.40, an important support level, in the coming days. A breach of that level would grease the skids for a move to $1.35, a level last seen in February, unless policymakers can come up with a credible solution to Greece's problems.
The euro was last down 0.1 percent at $1.4083, paring earlier losses after a slide halted at $1.4011. The euro had an even rougher day against the Swiss franc, falling to a record low of 1.2270 francs, down about 1 percent from late Tuesday. Against the yen, the dollar rose 0.1 percent to 81.98 yen, while the euro slipped 0.1 percent to 115.47 yen.
Traders said worries about US public finances and signs of slower growth - data on April durable goods orders was the latest to show the economy may be hitting a soft patch - limited the volume of dollar buying against the euro. The single currency also pared losses after Finland approved an EU/IMF bailout for Portugal, while demand from hedge funds also prompted a squeeze in euro short positions.
Offers from sovereign investors could start appearing around $1.4100, which will limit euro upside. Further resistance is seen around $1.4195, traders said. A move by clearing house LCH.Clearnet to raise the additional margin required on Irish government bonds also provided a modest euro boost, as analysts said it would require more euro buying in the short-term.
However, Citigroup said in a note that its index on hedge fund positioning showed these investors had unwound long bets on the euro in the past few weeks but were still in "overextended territory," implying further euro losses. Below that, euro/dollar could find support near $1.3985, the 100-day moving average, before sliding toward the $1.3770 area, the 38.2 percent Fibonacci retracement of the euro's rise from June 2010 to May 2011.
Steven Englander, head of G10 FX strategy at Citigroup in New York, said it is "increasingly difficult" to see how things will hold together to resolve the sovereign borrowing issues. "The euro at $1.40 is expensive given these pressures. However, it more likely faces a grind lower rather than a cliff jump," he said.