LONDON: The euro fell on Monday and was expected to struggle going into the year-end after EU policymakers agreed on deeper economic integration but fell short of a convincing plan to deal with a funding crisis undermining the stability of the euro zone.
European Union states barring Britain decided to set stricter budget rules for the single currency area and to provide up to 200 billion euros in bilateral loans to the International Monetary Fund in response to the turmoil.
But uncertainty about the drawn-out process of implementing changes, no emphatic action on cash-starved European banks and in particular a lack of commitment from the European Central Bank to step up purchases of highly-indebted euro zone countries' bonds put the euro back under pressure.
It was down 0.5 percent on the day at $1.3300, finding some support ahead of Friday's low of $1.3280. It is now almost 6 percent below its October peak and 10 percent off its 2011 high of just under $1.50, struck in early May.
"There is a deflated feeling for the euro this morning after the EU summit. People were looking for a greater response and more importantly the ECB refused to significantly step up their bond buying," said Beat Siegenthaler, currency strategist at UBS.
"If euro zone bonds come back under pressure there isn't much of a backstop to support the markets," he added.
The ECB is capping its weekly bond purchases at 20 billion euros and was not considering any more substantial action, sources at the bank told Reuters on Friday.
Traders said they were closely watching the bond yields of Spain and Italy as those countries look to raise an estimated 7 billion euros through bond sales this week. France, the Netherlands and Italy are due to auction Treasury Bills later in the day.
The euro was put under added strain late in the Asian session when rating agency Moody's said euro area sovereigns would remain under pressure in the absence of decisive initiatives, with the cohesion of the zone under continued threat.
"The summit addressed long-term problems of fiscal consolidation, but Europe is facing a pretty serious funding crunch in the weeks to come. There's no immediate solution to address this problem," said Teppei Ino, a currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
Markets were also waiting for a response from Standard & Poor's which, right before Friday's summit, warned it may carry out a credit downgrade of euro zone countries en masse if they fail to move decisively to stem the crisis.
SPECULATORS SHORT
The euro remained tethered in the $1.3200-$1.3500 band it has moved in since late November while IMM data showed only a small reduction in the speculative short euro base, raising the potential for a short-covering corrective rally, analysts said.
But any rebound was mainly likely to provide better levels to sell the common currency, and on the downside traders said a break of $1.3250 support could lead to a test of the November low at $1.3210 and then the October trough of $1.3145.
While bilateral loans to the IMF will beef up its resources to help struggling states, the volume of the euro area's bailout fund was still seen as insufficient to safeguard its core economies from contagion from the crisis.
The capacity of the permanent bailout fund was capped and it was not granted a banking licence.
Moreover, analysts said that even if bond yields stabilise, Europe is likely heading for a recession, with purchasing manager surveys to be released later in the week expected to point to contraction in the region's manufacturing and service sectors.
With the euro on the defensive, the dollar index rose 0.5 percent to 79.037. The dollar was flat on the yen, last trading at 77.66 yen.
Higher-yielding currencies such as the Australian dollar fell back with equity markets under pressure. The Aussie was down 0.7 percent on the day at $1.0145 with technical analysts seeing support at $1.0058, the 21-day moving average.
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