The euro retreated from two-week highs against the dollar on Monday on worries the eurozone debt crisis could ensnare higher-rated countries, with gloomy economic prospects and rising political risks likely to keep it under pressure. The euro fell 0.7 percent to $1.3127, holding below Friday's peak of $1.3225, which was logged after a near 1 percent rally in the week, its best since late February. It hovered just above near-term support at its 100-day moving average around $1.3120.
"If bond spreads continue to widen and stock markets come under more pressure, we could see the euro drop towards $1.3050 rather than head towards $1.3250 in the near term." Many market participants expect the euro to trade in a range between $1.3000 and $1.3300, with worries about feeble eurozone growth likely to dominate sentiment. But analysts said the euro could fall sharply once it makes a sustained break below strong chart support at $1.30.
"The euro has been above $1.30 for three months now, so a move under $1.30 could bring some more participants in," said Chris Turner, head of currency strategy at ING. ING forecasts the euro will fall to $1.20 by the end of the second quarter. The euro, which also lost more than 1 percent against the yen, gained only limited support from a weekend deal to double the International Monetary Fund's firepower to contain the debt crisis.
The pullback in the euro pushed the dollar index 0.4 percent higher to 79.492. The dollar could gain if Federal Reserve policymakers bring forward their projection on when the Fed should start raising interest rates at its two-day meeting starting on Tuesday, though this is far from assured. The dollar shed 0.5 percent against the safe-haven yen to trade at 81.09 yen. But yen gains were seen as limited before a Bank of Japan policy meeting on Friday, which is expected to adopt fresh easing steps.