The euro tumbled against the dollar on Monday after European Union leaders failed to agree on a long-term budget and extended the deadline for ratifying a proposed EU constitution. The euro fell as low as around $1.2170 in early Asian trade, plunging from around $1.2285 in late US trade on Friday before paring back some of those losses on short-covering.
The summit break down at the start of the weekend threatened the 25-nation bloc with financial paralysis on top of the political uncertainty wrought by the referendum defeat in France and the Netherlands.
"Recent events show how difficult further European integration will be," said Seiya Nakajima, chief economist at Itochu Corp.
The single currency had risen to a nine-day high of $1.2289 on Friday as a record US current account deficit sapped appetite for the dollar.
The euro shuffled in a narrow range for much of the Tokyo session, but dealers said selling could resume later in the day as European and US traders enter the market and react to the EU news.
Traders also said that rising gold and oil prices could prompt investors to dump the euro for currencies of commodity-producing countries, such as the Australian dollar.
"The euro showed some resilience after falling sharply early, but fresh short positions are still being created and there are also sell orders on the upside," said a dealer at a foreign securities firm. The euro fetched $1.2205.
The dollar changed hands at 108.75 yen. The euro's fall drove the Japanese currency to as far as around 109 per dollar from around 108.60.
Dealers said that the euro's fall was stemmed partly by resurging worries about the US current account deficit.
Before the EU summit on Friday, the euro jumped nearly two cents after data showed the US current account shortfall swelled to $195.1 billion - or 6.4 percent of US gross domestic product - in the first three months of this year.
That was above the $190 billion forecast by economists and up from $188.4 billion in the final quarter of last year.
"The euro is likely to dip. But it had recovered from around $1.20, so I think it's likely to be a minor dip because the dollar has been over-bought recently," said a trader at a Japanese bank.
US light crude futures hit a record high on Monday, making yen buying difficult given Japan's utter dependence on imported oil, dealers said.
"The dollar/yen will probably stick around 109 yen. You can't buy the yen when oil prices are rising," said Kota Kimura, assistant forex manager at Shinkin Central Bank.
The dollar hit an eight-month high of 109.72 yen last week.
Data from the US Commodity Futures Trading Commission showed on Friday that speculators sharply increased their net short position in the yen and sterling against the dollar in the week.
Their net short sterling position nearly doubled from the previous week to 16,949 contracts, the largest in more than five years. Their yen short position grew to 53,164 contracts from 37,111.
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