LONDON: The euro fell versus the safe haven Swiss franc on Wednesday as the euro zone debt crisis returned to centre stage on concerns Italy is struggling to cope with its debt burden, while the prospect of more US monetary stimulus weighed on the dollar.
The single currency dropped more than 1.5 percent to a session low of 1.1631 francs on trading platform EBS, while the dollar fell to a low of 0.8057 francs , retreating from a recent high of 0.8239 struck on Monday.
Analysts said some investors were taking profits after the euro failed to break through 1.2000 francs earlier this week.
A German cabinet decision that set policymakers on course for parliamentary ratification of changes to the euro zone's bailout fund helped push the single currency briefly to a session high of $1.4470 versus the dollar .
But it was last flat on the day at $1.4442 as it ran into selling by macro and real money investors. Traders said month-end demand for dollars was weighing on the euro and cited small sell orders starting from $1.4480.
Lukewarm demand at an Italian bond auction on Tuesday and signs of backtracking on Rome's budget changes weighed on the euro, reigniting worries over the enormous debt burden facing the euro zone's third largest country.
"The difficulty the market has at the moment is finding a reason to buy any currency. The euro zone has got a peripheral problem, the US has got a potential QE problem," said Daragh Maher, deputy head of FX research at Credit Agricole.
"The Swiss franc remains a safe play. If numbers do not improve, people remain nervous and the euro zone situation remains grim we can expect to see the franc strengthen again."
Minutes from the US Federal Reserve's Aug. 9 meeting showed policymakers discussed a range of unusual tools they could use to help the economy, adding to expectations the Fed may flag a third round of quantitative easing at its two-day meeting in September.
Any moves to inject more liquidity into the US economy would undermine the greenback and analysts said speculation was likely to keep the dollar weak in the run-up to the meeting.
Euro zone data reinforced the view the European Central Bank will halt its cycle of rate rises for the foreseeable future, with inflation coming in unchanged at 2.5 percent in August as expected while the number of people without jobs increased.
FRANC DEMAND
Despite its climb, the Swiss franc remained well below record highs hit versus both the euro and dollar earlier this month when investors scrambled for safety from a stock market slide.
As a result of huge liquidity injections by the Swiss National Bank, the dollar is on track for its best monthly performance against the franc since May 2010, and the euro for its best since January 2011.
In the options market, one-month euro/Swiss vols edged higher to 17 percent on Wednesday, indicating investors expect further strong moves in the Swiss franc as concerns over a global growth slowdown persist.
"The liquidity injection is close to an end in terms of new money coming in, which means Swiss franc weakness is likely to (end).... The SNB will have to intervene more aggressively from now on," said George Saravelos, FX strategist at Deutsche Bank.
The dollar dipped 0.1 percent to 76.60 yen , but was seen supported by bids around 76.50 yen from Asian players.
With the yen hovering near a record high against the dollar of 75.941 hit earlier in August on trading platform EBS, market players remain wary of the potential for Japanese authorities to intervene to sell the yen.
Commodity currencies were underpinned by the growing prospect of further monetary easing by the US Federal Reserve, but failed to make much headway as the broadly negative tone on growth and risk crept into the markets.
The Australian dollar fell 0.1 percent to US$1.0673 , while the New Zealand dollar was up 0.1 percent at US$0.8542 .
Copyright Reuters, 2011
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