Euro falls to 2-year low versus dollar, more losses seen

The euro slumped to a two-year trough against the dollar on Tuesday and more losses were expected as euro zone ministers failed to dispel fears about the
debt crisis and investors awaited a German court verdict on the region's bailout fund.

The euro zone common currency fell to a low beneath $1.2250,
opening the way to a test of the key $1.20 area. A break below
that could see the currency slide towards its June 2010 low of
$1.1875, which marked the weakest since March 2006.

Euro zone ministers agreed to grant Madrid an extra year
until 2014 to reach its deficit reduction targets in exchange
for further budget savings. They did not agree a final figure
for aid to ailing Spanish lenders, but said some 30 billion
euros would be available by the end of July. [ID: nL6E8IA31V]

But markets were disappointed the meeting did not offer
more. Investors were also on edge as the German Constitutional
Court began a hearing into whether the euro zone's fund, known
as the European Stability Mechanism, and planned changes to the
region's budget rules are compatible with German law.

The court is not known to be pro-Europe and an adverse
verdict could hurt integration plans. German Finance Minister
Wolfgang Schaeuble said any significant delay in approving the
EU's permanent bailout fund could fuel turbulence in financial
markets and hurt confidence in the euro zone.

The euro has been net sold for five consecutive trading
sessions and is now the strongest net sold currency across the
board, said Samarjit Shankar, managing director of global FX
strategy at BNY Mellon in Boston.

"We're seeing investors once again losing some of their
optimism on Europe," said Shankar.

The euro fell as low as $1.2233, its lowest since
July 1, 2010. It last traded at $1.2257, down 0.5 percent.
The common currency also fell to a five-week low of 97.20
yen and last traded down 0.7 percent at 97.37,
according to Reuters data.

Italy's Prime Minister Mario Monti, under intense market
pressure to shape up his economy to avoid it being drawn into
the centre of the debt crisis, said the country could be
interested in tapping the euro zone's rescue fund for bond
support.

One bit of good news for the euro came by way of a drop in
Spanish and Italian borrowing costs, with Spain's 10-year bond
dipping back below the critical 7 percent level.

Analysts said the political hurdles on how to use the euro
zone's rescue fund and prevent further contagion remained very
high.
"I think we have a long way to go before we reach the stage
at which policymakers will be ready to act, particularly as it
relates to potential bond purchases in the secondary market,"
said Todd Elmer, currency strategist for Citi in Singapore.

Sterling, meanwhile, hit a fresh 3-1/2-year high against the
euro as the market's focus switched back to the euro
zone debt crisis, spurring the pound to recover from an early
dip caused by comments from the Bank of England
governor.

reuters