LONDON: The euro clawed back from one-month lows against the dollar and yen on Wednesday after the European Central Bank was seen defending Italian and Spanish debt from a renewed market sell-off.
The euro fell as low as $1.3429 in Asian trade, its weakest since early October, after a rise in bond yields for France and other countries previous considered relatively safe in a debt crisis investors worry is spiralling out of control.
Market participants saw more downside risks for the euro as benchmark Italian government bond yields hovered near 7 percent, a level which many in the market consider to be unsustainable, while its yield against safe-haven German debt has been stuck near its widest ever.
A climb in yields in France, Belgium and Austria has raised concerns they could come under increasing attack as incoming governments in Italy and Greece struggle to implement fiscal .
"A new government is coming in Italy but there's still no improvement on bond markets so it's hard to see what can be done in the short term to reverse this," said Lutz Karpowitz, currency strategist at Commerzbank in Frankfurt.
By 0921 GMT, the euro traded flat on the day at $1.3530, as Middle Eastern names were seen buying the single currency. In earlier trade, some Asian names were seen selling on the euro's break below $1.35.
The single currency slid as low as 103.41 yen, its lowest since Oct. 10, before clawing back to around 104.00, down 0.3 percent on the day.
The concerns about the euro zone also prompted selling in the Australian and New Zealand dollars, which are considered to be higher-risk currencies, to the benefit of the safe-haven dollar.
Against a currency basket, the US currency hit a one-month high of 78.397, and traded slightly higher on the day.
RISKS SPREADING TO GERMANY?
Some in the market see further downside for the euro as funding strains among European banks are evident with euro/dollar three-month cross currency basis swap spreads widening to a level not seen since late 2008.
With the currency bloc caught in a vicious cycle of falls in government bonds which hurt the region's big banks and in turn further undermine confidence in the area, the euro is coming under heavy pressure.
The next immediate target for euro/dollar is seen at $1.3405-10, the bottom of the weekly Ichimoku cloud and a 76.4 percent retracement of the pair's rally last month. A break there would open the way for a test of the Oct. 4 low of $1.3145.
Daisuke Uno, chief strategist at Sumitomo Mitsui Bank in Tokyo, said the debt crisis that started in Greece two years ago may be festering even in Germany.
"In the past, the spreads of periphery countries gained as their bond yields rose, while German bund yields fell. But these days bund yields hardly fall. What this means is that the debt domino is almost reaching Germany," Uno said.
"I think the ECB is likely to take policy action, probably buying more government bonds and cutting rates, even before the next policy-setting meeting on Dec. 8," he added.
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