The euro fell to a six-week low against the dollar on Wednesday, as investors shunned eurozone assets on concerns over the stability of the region's banks and signs that its debt crisis is starting to threaten even Germany. The common currency came under renewed selling pressure after one of the least successful auctions of German government debt since the single currency was launched.
That was a dangerous sign that the eurozone's prime asset was starting to lose its appeal amongst investors frustrated by the debt crisis and the absence of new measures from policymakers to stop the financial rot. Many expect the longer the crisis lingers, the more likely it is that paymaster Germany will have to dig deep into its pockets to bail out Europe's weaker nations.
Raising concerns about an additional fiscal burden for France and bringing its triple-A rating in focus, Belgian newspaper De Standaard reported Belgium and France were in fresh talks to rescue ailing bank Dexia. Risk appetite also took a hit after the HSBC flash manufacturing purchasing managers' index (PMI) showed China's factory sector shrank the most in 32 months in November as new orders slumped. The eurozone's private sector also contracted for a third month as the debt crisis pushed the region to the brink of a recession.
The euro shed 1 percent against the dollar to $1.3373, with talk of option barriers at $1.3350 likely to provide it near-term support. Its losses pushed the dollar index to a fresh six-week high of 78.893. Against the yen, the euro was down 0.7 percent at 103.32 yen. Front-end euro/dollar volatilities picked up as spot euro fell, with one-week vols moving to 14.50 percent from 13.45 percent and one-month rising to 15.95 percent versus 15.50 before the German bond auction.
The risk-off sentiment saw the Australian dollar extend its losses to touch a seven-week low of $0.9706 at one point. The US dollar was 0.3 percent higher against the yen at 77.16 yen with offers from Japanese exporters cited above 77.40. A fund manager at Stratton Street Capital said he expected dollar/yen to eventually drop to a record low of 60 yen despite the best efforts of Japanese authorities to curb the yen's rise.