LONDON: The euro fell on Tuesday, coming close to recent lows versus the dollar and hitting a one-month low against the yen as rises in Italian and Spanish bond yields underscored the difficulties facing policymakers in containing the region's debt crisis.
Initial optimism following a change in leadership in Italy and Greece soon faded as it failed to stem an increase in Italy's borrowing costs, while other euro zone bond yields, including Spanish and French, have also risen.
The euro was down 0.4 percent at $1.3572, edging closer to last week's low of $1.3484 and pulling well away from the late October high of $1.4248. However, traders cited talk of Asian sovereign demand which was helping to stem the euro's falls.
On Monday, the euro fell below $1.3600, having broken above the $1.3800 level in early trade.
"The recent moves up in the euro should have left the market more balanced in terms of positioning, with the price action suggesting that there has been more squaring of short positions," said Nordea currency strategist Niels Christensen .
"A break below $1.3480 would leave people more inclined to take on fresh short positions," he said, adding that the common currency would be particularly sensitive to further moves in euro zone bond yields.
Particularly worrying in recent sessions has been a rise in French bond yields, while the yield spreads of Belgian and Austrian 10-year bonds over German Bunds have also hit euro-era highs.
Data from the Commodity Futures Trading Commission showed speculators cut back net short positions in the euro in the week to Nov. 8, suggesting the euro had diminishing scope for further short-covering rallies.
"There is no doubt that Europe is nowhere near a situation that can be viewed with optimism," said Junya Tanase, chief FX strategist for J.P. Morgan in Tokyo.
The euro fell 0.4 percent against the yen to 104.63 yen, having hit a one-month low of 104.55 yen on trading platform EBS.
Market players will be watching for euro zone gross domestic product data and the ZEW German sentiment survey at 1000 GMT.
EURO ZONE FOCUS
Yields at a 3 billion euro five-year Italian bond sale on Monday hit euro-era highs of 6.29 percent , just a day after former European Commissioner Mario Monti was named to lead the country -- a move that had been hoped would help restore investor confidence.
Although market players said the sale went reasonably well, Italian bond yields rose in the secondary market on Monday after the auction, while the 10-year Spanish government bond yield climbed above 6 percent for the first time since August.
Position unwinding by various financial institutions ahead of quarter-end and year-end book closings at the end of December is likely to add to selling pressure against euro zone debt, said Makoto Noji, senior bond and currency strategist for SMBC Nikko Securities in Tokyo.
"Position unwinding may continue ahead of book closings and such moves may end up becoming factors that led to euro weakness," Noji said.
More euro zone debt auctions are coming this week, with Spain aiming to sell between 3 billion euros ($4.1 billion) and 4 billion euros of 10-year bonds on Thursday.
The dollar was 0.15 percent lower against the yen at 77.01 yen. It had earlier jumped around 40 pips to an intraday high of 77.51 yen but gave back its gains.
Market players remain wary of the possibility of Japanese action to curb the yen's strength after Japan sold an estimated 7.7 trillion yen ($98.5 billion) -- a daily record for intervention -- on October 31.
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