LONDON: The euro fell broadly on Monday, touching a three-week trough versus the dollar as worries about Greek and Italian public deficits and a regional election rout for Germany's ruling party cast more doubt on the euro zone's ability to tackle its debt crisis.
The single currency fell to $1.4113 on electronic trading platform EBS, its weakest since mid-August. It pared losses as Asian sovereign names stepped in to buy the euro ahead of $1.4110, while bids were seen below that key technical support level.
Other currencies perceived to be higher risk, including the Australian and New Zealand dollars, also took a hit against the dollar, while the greenback climbed to a one-month high versus a currency basket.
The suspension of an EU/IMF mission to Greece late last week has raised questions over whether Greece can cut its budget deficit enough to secure another tranche of bailout funds, while Italy's inability so far to meet its budget commitments continues to hammer its sovereign bond market.
Analysts see more downside risks to the euro after a big fall in support for Angela Merkel's Christian Democrats in a regional vote in Mecklenburg-Vorpommern on Sunday highlighted the German chancellor's waning popularity.
Merkel has been losing support as Europe's top economy bears the brunt of assisting its heavily indebted neighbours, and Sunday's result suggests she will face a hard time winning the blessing of voters for more aid, while political instability increases.
"The pressure will be for the euro to move lower given the news flow, but every time we move down to these levels we see (sovereign) rebalancing flows come in," said Richard Falkenhall, currency strategist at SEB in Stockholm.
"So whether we will see a break below $1.41 is hard to say."
Asian sovereign buying in euros, along with Russian and eastern European demand ahead of $1.4110 helped to lift the single currency from its lows.
Technical support also reinforced $1.4110, the 61.8 percent Fibonacci retracement of the euro's July-August rally.
The euro rose to around $1.4160 in European trade, but its upside was limited by sell offers from $1.4180 through $1.42, while some large banks were interested in selling above that.
The euro's losses pushed the dollar to 75.074 versus a currency basket, its highest since early August. The basket is weighted mainly in euros, making it sensitive to fluctuations in that currency.
Against the yen, the dollar was flat on the day at 76.82.
The Australian and New Zealand dollars each fell around 1.0 percent versus their US counterpart. Those commodity-linked currencies are considered higher risk due to their higher yields and their dependence on growth in the global economy.
The single currency fell 0.7 percent to 1.1113 Swiss francs, as the ongoing economic concerns in the euro zone along with evidence of a continued slowdown in the US economy raised demand for safe-haven assets.
The franc's broad gains in the past week or so have raised expectations the Swiss central bank may have to initiate more measures to weaken the currency.
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The euro faces a week packed with more potential event risk -- political, legal, and economic -- that could pressure the currency lower.
Germany's constitutional court will rule on Wednesday on suits claiming Berlin is breaking German law and European treaties by contributing to multi-billion euro bailouts of Greece, Ireland and Portugal.
Focus will also be on a slew of policy announcements by major central banks, given strong indications the global economic recovery is stuttering.
This was highlighted by US data late last week showing employment growth ground to a halt in August.
Analysts said the euro will face more selling if the European Central Bank, which will make a policy announcement on Thursday, suggests increasing concerns that a deepening debt crisis is cranking up overall risks to the euro zone.
"The biggest downside risk for the euro is for a more dovish statement from the ECB, highlighting the impact of negative developments of late and potentially suggesting that the slowdown that we've been seeing is here to stay," said Valentin Marinov, currency strategist at Citi.
"This would open the door to speculation for a rate cuts. and that's not what the market is expecting," he said, adding that this could trigger a test of $1.40 in euro/dollar.
Investors also awaited plans due on Thursday from US President Barack Obama to kickstart job creation.
Aggressive measures would be seen as positive for the global growth outlook, but many in the market say appetite is low for expensive spending given that the government's fiscal house is in disarray.
Copyright Reuters, 2011
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