NEW YORK: The euro fell to its lowest level against the US dollar in four months on Wednesday, weighed by a weak Italian bond auction and concerns that Cyprus' recent rescue deal could serve as the pattern for future bailouts in the region.
Italy paid more to borrow over five years than it has since October as lack of progress in forming a new government and worries about Cyprus' bailout hurt demand at a debt auction.
Italian center-left leader Pier Luigi Bersani will report to President Giorgio Napolitano by Thursday on the outcome of talks with other parties about forming a government.
Cyprus, meanwhile, will impose a ban on cashing checks and limit the amount of cash that can be taken out of the country as part of a series of measures to avert a run on the country's banks when they reopen on Thursday, the central bank said.
Cyprus and the European Union, European Central Bank and the International Monetary Fund agreed Monday to restructure the country's two largest banks, forcing shareholders and large depositors at the Bank of Cyprus and Popular Bank of Cyprus to take losses in return for a 10-billion-euro bailout.
"The past few days have been mired by endless speculation over the precedent the bailout of Cyprus might set for other peripheral countries," said Christopher Vecchio, currency analyst at DailyFX in New York.
The euro last traded at $1.2776, down 0.65 percent on the day and off over 3 percent this year. The euro fell as low as $1.2750, its lowest since Nov. 21.
A bleak outlook for the euro zone's economy and the risk of capital flight should continue to weigh on the euro.
The euro's drop below support at its 200-day moving average of $1.2881 on Tuesday left it vulnerable to more losses toward its mid-November low of $1.2661, traders said.
Investors bought the safe-haven dollar, pushing the dollar index against major currencies to a 7-1/2 month high.
"It is the risk-of-capital flight out of Cyprus that is worrying," said Mankash Jain, head of FX and investment management at hedge fund Solo Capital in London. "Investors would want to hold the dollar or German Bunds in such a scenario. We see the euro going only one way - and that is down."
EU and ECB officials have sought to quash the suggestion that the Cyprus bank restructuring was a template for future bank bailouts in the euro zone.
The spread between the yields on two-year US Treasuries and their German counterparts has widened to its highest since late December in favor of the former. That is likely to support the dollar, traders said.
"Cyprus is certainly still weighing on the euro, but the bulk of the move lower today was triggered by the Italian debt auction," said Greg Anderson, G10 strategist at CitiFX, a division of Citigroup in New York.
"Rising Italian borrowing costs and its political situation are both negatives," he said. "Investors are not overly short the euro, so there is plenty of scope for the euro to test the lows of the past cycle."
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