The euro fell against the dollar on Thursday and touched a record low against the Australian dollar and a 3-1/2-year trough versus sterling, as weak US data and fresh warnings from Germany about Spain's banking troubles diminished risk appetite. A slew of soft US economic data reinforced views that recovery in the world's largest economy has stalled, prompting investors to pare back positions in higher-yielding assets perceived as risky.
Riskier currencies such as the Australian and New Zealand dollars were still up on the day against the dollar and euro, but off their peaks. Comments from German Finance Minister Wolfgang Schaeuble ahead of a German parliamentary vote on aid for Spanish banks did not help the common currency. Schaeuble said Spain's financial troubles are far from over and its government should be ultimately responsible for European aid to its banks.
He also said that the mere perception of insolvency risk in Spain could cause contagion in the euro zone. "The Germans are being strict that the liability stays with the sovereign and all that does is exacerbate the debt burden of the sovereign and the market doesn't like that," said Boris Schlossberg, managing director at BK Asset Management in New York.
Losses in the euro, however, were capped by news that German Chancellor Angela Merkel ultimately won a parliamentary vote on the euro zone rescue package for Spanish banks despite growing unease in her center-right coalition over the rising cost of Europe's debt crisis for German taxpayers.
The euro hit session lows at $1.2227 in the wake of Schaeuble's comments and was last at $1.2270, down 0.1 percent on the day. Spanish 10-year yields climbed back above 7 percent after Schaeuble's comments. Spain sold 3 billion euros in debt at a higher cost than previous auctions. Analysts expect the euro to retest a two-year low hit last week because investors, discouraged by a lack of progress toward solving the euro-zone debt crisis, continue to shun the currency in favour of safer havens.
The euro also fell 0.4 percent against the yen to 96.42 yen and hit a record low against the higher-yielding Australian dollar as well as hitting a 3-1/2-year low against the UK pound. The euro zone's common currency also hit a record low versus the New Zealand dollar. The Australian dollar rose broadly, hitting a 2-1/2-month high against the US dollar of A$1.0445. Traders cited demand from Australian companies to buy the currency as well as talk of central banks looking to diversify their holdings into Australian assets.
TD Securities in a note said falling volatility has spawned carry trades, in which investors borrow in lower-yielding currencies to buy assets with higher returns, at the expense of the euro and the dollar. Since the start of the year, TD said, EUR/AUD shorts have produced total returns of more than 9 percent, EUR/NZD shorts nearly 10 percent, while EUR/CAD shorts have yielded returns of just under 7 percent. The US dollar fell to a six-week low against the yen of 78.42 yen, with investors preferring the Japanese currency due to the chance of more US monetary easing. It last traded at 78.57 yen, down 0.3 percent on the day.