The euro slipped on Wednesday after a newspaper reported Belgium and France were in fresh talks over an existing rescue deal for Dexia, stirring worries about the potential for an increased fiscal burden on France. Belgian newspaper De Standaard said that talks were taking place, citing no sources, although it also said that Belgium's finance minister Didier Reynders denied that the accord reached between the two states to rescue the bank would be dismantled.
The newspaper said the talks concerned the distribution of the costs between the two countries after the rescue of Dexia, the first government bailout of a European bank in the eurozone debt crisis. Market players said the report stirred worries that France may end up playing a larger role in the bailout plan, which if true could have implications for France's AAA credit rating.
"It's all about France taking a larger stake in Dexia - if they do they run the risk of a sovereign downgrade," said a US-based currency trader. The euro fell 0.3 percent to $1.3472, nearing support at last week's low of $1.3421 on trading platform EBS. "Broadly speaking, certainly anything that threatens France's credit status is likely to be taken as negative for the euro," said Todd Elmer, currency strategist at Citi in Singapore. The euro's drop helped lift the dollar index to a six-week high of 78.549 at one point.
The euro has been trading on either side of $1.3500 for days now, underpinned by talks of repatriation flows from European banks and a reluctance by speculators to put on more negative positions in an already short market. The Australian dollar extended its losses on the data and touched a six-week low of $0.9755 at one point. After trimming some losses, the Aussie dollar was last down 0.5 percent at $0.9780. With Tokyo players away for a national holiday in Japan, moves in the dollar versus the yen were subdued, with the dollar holding steady at 76.98 yen.