The euro fell to its lowest level against the dollar in four months and hit another record low against the Swiss franc on Tuesday on fears that eurozone leaders are failing to contain risks of peripheral debt. The eurozone debt crisis is far from resolved, made evident late in the New York session when Moody's Investor's Service cut Ireland's credit rating to junk status.
The ratings agency said the country will likely need additional rounds of financing before it can return to capital markets. Ireland, meanwhile, said it has sufficient funding under its existing European Union-International Monetary Fund bailout package to cover its financing requirements until the end of 2013.
"This is the kind of story that will fan fears about contagion of Greece's debt crisis to the broader eurozone," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "Similar to Portugal getting downgraded last week, it was not a huge shock."
Borrowing costs for Italy and Spain soared to 14-year highs earlier in the session as eurozone leaders conceded for the first time that Greece might have to default on some of its debt. Investors fear a Greece default could ripple through Europe's banking system, putting pressure on stretched public finances in other euro-zone countries. Italy, the eurozone's third-largest economy, looks especially vulnerable: Its debt-to-output ratio is second only to Greece, and markets fear political bickering may derail a plan to slash spending and rein in the deficit.
The euro fell as low as $1.3835 a four-month low, though data showing a wider US trade deficit and talk that the ECB was buying euroone debt helped pare some losses. It was last down 0.4 percent at $1.3974. The dollar briefly came under pressure in mid-afternoon trade after the Federal Reserve released the minutes of its June 21-22 policy meeting and gave no surprises on its economic and interest-rate outlook. The euro fell to a record low against the Swiss franc for a second straight day, and last traded at 1.1618, down 0.9 percent on the day. The franc is seen as a traditional safe haven in times of trouble.
The yen, also considered a shelter from the storm, rose broadly, The dollar fell 1 percent to 79.42 yen, near its lowest since March. The euro dropped 1.4 percent to 110.98 yen. If the EU can calm markets, analysts said the focus could shift to the dollar and the US debt ceiling. If lawmakers don't agree to lift the legal US borrowing limit by August 2 the US Treasury Department has warned it may have to default on some debt.