Euro slips as focus returns to sovereign debt crisis

NEW YORK: The euro fell broadly on Thursday as lackluster European data and a jump in Italy's borrowing costs fueled fears the euro zone debt crisis is spreading.

The euro's losses, however, could prove limited if US lawmakers fail to reach a compromise on a deficit reduction plan that would head off a default.

A Republican deficit reduction plan headed to a close vote in the US Congress on Thursday and the White House urged divided lawmakers to clinch a compromise to head off the risk of a debt default by the world's largest economy.

The euro is one of the few currencies not benefiting from the threat of America losing its triple-A rating as investors become increasingly doubtful last week's second bailout for Greece will keep the crises from spreading to Italy and Spain.

Italy sold 10-year bonds but only at the cost of yields soaring to their highest in 11 years while data showed euro zone economic sentiment worsened more than expected in June.

"Additional signs that last week's (Greece) plan may not be implemented as expected will keep alive the risk of contagion to economies like Italy, which are in fact too big to bailout and keep the euro pressured, even against the otherwise struggling dollar," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

The dollar, however, remains vulnerable as each day without a deficit reduction deal means an increasing risk of default or downgrade, Esiner said.

In early afternoon New York trading, the euro was down 0.4 percent at $1.4302, with little support until around $1.41850-$1.41870, the roughly 50 percent Fibonacci retracement of the $1.38376/$1.45370 rally this month.

Large pension funds and foreign central banks have been flocking to assets not seen at "true AAA" rated, a trader said, with Australia and Canada benefiting from strong fiscal balance sheets.

The Swiss franc earlier rose to a record high against the dollar of 0.79900 franc on trading platform EBS. The dollar later gained and last traded at 0.80280, up 0.2 percent.

For a second straight day, the dollar was up against a major currency basket, trading 0.2 percent higher at 74.232. While many investors believe a last-minute deal will be worked out to increase the US borrowing ceiling, most are starting to price in the prospect of a downgrade.

"A downgrade though likely would not be meaningful. First of all, everybody knows that the US fiscal debt is a problem, so the ratings agencies won't be saying anything new," said Paul Markham, director and portfolio manager at Newton Capital Management Ltd in London.

"There would be a higher borrowing cost attached to a US downgrade, but the US is still the deepest and most liquid fixed income market in the world."

Newton has assets under management of $76 billion.

The dollar, meanwhile, slipped 0.2 percent to 77.780 yen on EBS, near a four-month low of 77.570 yen hit on Wednesday. That was not far from a record low of 76.250 yen struck in March, which triggered a coordinated intervention in the market to stem the yen's strength.

Copyright Reuters, 2011