Euro drops to four month low versus dollar

TOKYO: The euro tumbled to a four-month low against the dollar on Tuesday with global markets plagued by anxiety over whether Greece's debt crisis could spread to larger economies such as Italy and Spain.

The single currency traded at $1.3958 in Tokyo trade, slipping from $1.4029 in New York Monday and at one point hitting a four-month low of $1.3932.

The euro bought 111.82 yen, falling from 112.51 in New York. The dollar was at 80.11 yen, easing from 80.24 yen.

The euro fell even as eurozone finance ministers met in Brussels to discuss a new rescue package for Greece, as fears mounted that Italy or Spain were next after both nations saw their borrowing costs soar on Monday.

The ministers said they would consider measures to "enhance" the European Financial Stability Facility, the 440 billion euro ($617.1 billion) fund set up to lend to eurozone nations.

International Monetary Fund managing director Christine Lagarde said Monday that Greece's efforts to close its budget gap have gone a long way but are "not sufficient".

Lagarde also said the turmoil that has raised fears of an Italian financial meltdown is "essentially market driven" but said Italy must implement fiscal consolidation and austerity measures to reduce the country's deficit.

Market players took the remarks as further signs of a lack of clear near-term fixes for Europe's sovereign debt problems, said Masafumi Yamamoto, chief FX strategist at Barclays Capital in Tokyo.

"One can't expect any near-term solutions, despite the possibility the market may be swung by headline statements concerning Greek debt restructuring or additional aid, the Italian problem, stress tests or other issues raised at the meeting of EU finance ministers," he told Dow Jones Newswires.

Credit Agricole echoed the sentiment in a note to clients.

"The fact that Italy and Spain are becoming increasingly embroiled in the crisis is a worrying development for policy makers," it said.

"It is unlikely that pressure will ease over coming sessions unless there is a clear and strong agreement in Europe."

Meanwhile, the Bank of Japan on Tuesday lowered its real GDP growth forecast for this fiscal year to 0.4 percent from an earlier 0.6 percent due to the March 11 disasters.

The central bank may have to revisit its economic view if eurozone sovereign debt woes lead to further turbulence in global financial markets said Takeshi Minami, chief economist at Norinchukin Research Institute.

"If the results of stress tests for European Union banks due later this week indicate further vulnerabilities, that would lead to further weakness in the euro and strength in the yen," damaging for Japan's export-driven economy, Minami said.

The dollar was firmer against other Asian currencies, rising to Sg$1.2286 from Sg$1.2221 on Monday, to 1,066.28 South Korean won from 1,059.35 and to Tw$28.91 from Tw$28.81.

The unit also gained to 43.13 Philippine pesos from 42.85, to 30.43 Thai baht from 30.30 and to 8,551.75 Indonesian rupiah from 8,526.75.

Copyright AFP (Agence France-Presse), 2011