The euro dropped to near a four-month low against the US dollar on Tuesday and looked poised to extend losses as uncertainty about Cyprus reignited fears about the future of the euro zone currency. Cyprus's parliament overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout, throwing efforts to rescue the latest casualty of the currency area's debt crisis into disarray.
The euro trimmed losses on the news, but the move was limited as concerns remained about whether the island country will receive the bailout it needs to avoid a debt default. "It leaves Pandora's Box wide open," said Mike Moran, senior currency strategist at Standard Chartered in New York. "If policymakers initially thought it was OK to tax depositors as heavily as they first suggested, one just doesn't know what plan B or C might be.
The rejection brought the east Mediterranean island, one of the smallest European states, to the brink of a financial meltdown. EU countries said before the vote that they would withhold 10 billion euros ($12.89 billion) in bailout loans unless depositors in Cyprus shared the cost of the rescue. The euro fell as low as $1.2843, according to Reuters data, its lowest level since November 22, after breaking key support around $1.2870, its 200-day moving average. It was last down 0.5 percent at $1.2894.
The currency trimmed losses briefly after the Cyprus vote when the European Central Bank said it was in contact with its IMF and EU partners and remained committed to providing liquidity within existing rules. Goldman Sachs, in a note to clients, said short positioning in the euro is not stretched yet and that implied volatility remains at levels well below those seen in past periods of stress, suggesting a slide to $1.25 or even lower in the euro/dollar is "entirely possible".
Some strategists said the market remains insulated by the European Central Bank's as-yet untested promise to buy government bonds in potentially unlimited amounts, if necessary, to help stabilise financial markets. The euro fell 0.5 percent against the British pound to 85.38 pence after hitting a five-week low. Sterling has been bought as a shelter in times of heightened uncertainty in the eurozone. Against the Swiss franc, the euro declined 0.4 percent to 1.2211 francs.
The dollar index, which measures the greenback against a basket of currencies, was up 0.3 percent at 82.911, not far from a seven-month peak of 83.166 set on Thursday. Against the yen, the euro slid 0.6 percent to 122.57. The dollar lost 0.2 percent to 95.07 yen.