LONDON: The euro slipped on Wednesday as European investors were unconvinced that plans announced the previous day to ramp up the firepower of the euro zone debt rescue fund would be enough to prevent the region from financial disaster.
The single currency plumbed a session low after concerns about the euro zone debt situation were highlighted by comments from Italy's markets regulator, who said the currency bloc was at risk of breaking up if the European Central Bank's role in the debt crisis remains unchanged.
Such concerns expanded the yield spreads between German bonds -- considered the safest in the euro zone -- and those of Italy and Spain, and analysts said the perceived lack of progress in solving the debt crisis would knock the euro lower.
"We're still trading on the underlying theme of widening spreads in the euro zone and limited probability of a near-term policy response and that means the underlying trend remains for a weaker euro," said Kasper Kirkegaard, currency strategist at Danske in Copenhagen.
He added that worries that debt problems are affecting core euro zone countries have increased following a media report on Tuesday that ratings agency S&P may soon revise its outlook on France's AAA credit rating to negative.
S&P's action in cutting ratings for 15 big banking companies, including European and US ones, was also worsening market sentiment to put the euro under selling pressure.
Euro zone finance ministers agreed to use the EFSF fund as a sort of bond insurance vehicle that would provide partial protection of 20-30 percent against losses on the principal of new bonds issued by a requesting member state.
This fell short of the view among investors that the fund must be boosted even more, and raised speculation that the ECB will have to take on a bigger role in guaranteeing the debt of weak members.
The euro fell 0.5 percent on the day to $1.3259, edging close to a seven-week low of $1.3212 hit last week.
Market participants expected a choppy session driven by demand from investors to rebalance their portfolios at the end of a volatile month which has seen the euro fall more than 4 percent versus the dollar.
Such flows were expected to boost the dollar across the board, while some analysts said this may also support the single currency.
"Most G10 currencies will be sold against the USD," analysts at CitiFX Wire said in a note. "The EUR is the exception, with foreign investors' need to reduce EUR hedges (i.e. buy EUR) likely to offset European investors' need to reduce US hedges."
Focus was on a big options barrier seen around $1.3250, which may keep the euro hovering around that level during the day. Traders suspected an Asian sovereign name was protecting a digital option scheduled to expire later in the day.
The dollar was boosted across the board, rising 0.4 percent versus a currency basket to 79.314, holding near a seven-week high hit last week. It edged up slightly on the day to 77.92 yen.
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