The euro fell broadly on Monday, with sentiment surrounding perceived riskier currencies dented by doubts a European summit later in the week will make headway in tackling the debt crisis. Investors readied themselves for a disappointing outcome to the European Union summit after a meeting between German, French, Italian and Spanish leaders on Friday saw differences remaining on common eurozone bonds.
The euro fell 0.7 percent against the dollar to $1.2481, with strategists anticipating demand for the safe-haven greenback would persist as uncertainty surrounding the European debt situation holds sway. "The market is not really expecting much to come out of it... A disappointing EU summit should keep market unease elevated and provide more tailwinds for the dollar," Valentin Marinov, currency strategist at Citi, said.
Support was seen near the June 12 low around $1.2441 and strategists said a break below that level would open the door to a test of the June 1 two-year low of $1.2288. The common currency dropped 1.4 percent against the safe-haven yen to 99.61 yen on trading platform EBS. Weak euro zone economic data and rising borrowing costs for peripheral countries will likely heap pressure on the European Central Bank to cut interest rates or expand liquidity operations, prospects likely to keep the euro subdued. "You have economic growth in the States probably running at about 2 percent annualised rate, and you've got growth in Europe a lot slower than that, so therefore in the relative growth scenario you would still favour the US and that's probably attracting cross-border flows," said Ken Dickson, investment director of currencies at Standard Life Investment.
Traders have piled back into the dollar since the Federal Reserve held off on aggressive quantitative easing last week and instead extended its "Operation Twist" programme, under which it sells short-term bonds and buys longer-term securities to lower longer-term interest rates.
Cautious market sentiment helped the dollar index extend gains from last week to hit a two-week high of 82.587. The dollar and the yen are usually the most sought-after currencies during financial market stress and economic uncertainty, although the yen's status as a safe-haven currency has been challenged amid concern over Japan's economic problems. The Australian dollar dropped 0.7 percent to US $0.9993, with good support expected at $0.9979, the 38.2 percent retracement of its June 1-20 rally. The New Zealand dollar also dipped, falling 0.4 percent to US $0.7855.