NEW YORK: Greece's unresolved debt restructuring knocked the euro from a six-week high against the US dollar and drove it to a 4-1/2-month low against the safe-haven Swiss franc on Monday.
The euro did cut some of the earlier losses after European Union leaders reached an agreement on the introduction of a permanent euro zone financial bailout mechanism, with details to be worked out at a later date.
"The leaders' agreement on a permanent ESM (European Stability Mechanism) was announced and the euro had a 30 pip move higher. There is also a squeezing of the short-euro position in the market, but I think once the dust settles the euro slides back," said Joe DeGeronimo, chief dealer at SMBC.
To start, the lack of a breakthrough in Greek debt talks pushed yield spreads between German Bunds and debt of euro-zone peripheral nations wider, adding to downward pressure on the euro. An auction of Italian government bonds went off smoothly but did little to calm concerns.
Negotiations between Greece's private creditors and the government on accepting voluntary losses on sovereign debt carried over through the weekend in Athens.
A hoped for agreement, despite stated progress, was not reached before the EU leaders summit.
Michael Woolfolk, a senior currency strategist at BNY Mellon in New York said: "What's surprising is that the euro is as strong as it is. Market action is suggesting the downside risk for the euro is not as once feared."
The single currency was last down 0.68 percent on the day to $1.3134, according to Reuters data, having hit a six-week high in early trade but falling as low as $1.3074 in the New York session.
Suggestions that Greece should give up control of its budget policy to European institutions drew an angry reaction from Greek Finance Minister Evangelos Venizelos, which traders said weighed on sentiment.
Germany tried to dilute the suggestion by saying the euro zone was discussing several ways to guide the implementation of budget savings programs in countries that have taken up rescue funds but had not settled on one proposal.
French President Nicolas Sarkozy, speaking after the EU leaders summit, said both he and German Chancellor Angela Merkel oppose placing Greece under budgetary control.
He also said the Greek debt talks were moving "ahead in the right direction" and that he was hopeful they will reach an agreement "in the next few days."
But a deal that would cut the long-term value of privately held Greek bonds by just over 70 percent is thought to be nearing, raising hopes the country at the heart of the euro-zone debt crisis can avoid a messy default.
The talks have run into trouble over the coupon rate and whether the European Central Bank and other public creditors must also take losses on their holdings.
Valentin Marinov, a London-based strategist for Citi, said apart from uncertainty about a Greek debt deal, worries about its near-term fiscal outlook would remain.
"In this regard, today's EU summit could fail to lastingly appease investors' concerns," he said. "As a result, euro/dollar can lose most of its pre-EU summit gains in coming weeks. This will be a repetition of a pattern of pre-summit gains and post-summit losses we have observed in the past."
The euro is on track for gains against the dollar this month but overall sentiment is bearish as the debt crisis rumbles on and the prospect of a euro-zone recession looms.
EURO STRUGGLES VS SWISS FRANC
The euro fell to a 4-1/2-month low against the Swiss franc at 1.2034 francs, according to Reuters data, but traders said large bids were preventing a move toward the Swiss National Bank's franc cap of 1.2000. The pair traded at 1.2053 in afternoon New York activity.
Despite the losses, Nomura recommended investors double-long positions in the euro against the Swiss franc. The firm said the euro/Swiss franc floor at 1.20 francs is absolutely credible and there would be no change in policy despite SNB Chairman Phillip Hildebrand's recent resignation.
They recommended buying euros at the spot rate of 1.2060 francs, with a target of 1.2450 and stop loss at 1.1990.
Against the yen, the euro fetched 100.20 yen, down 1.18 percent, according to Reuters data, after earlier touching a one-week low.
The Australian dollar moved further away from a three-month peak hit in the wake of the US Federal Reserve's pledge last week to keep interest rates low and after rating agency Fitch put major Australian banks on a negative ratings watch.
The dollar extended its losses 0.51 percent to 76.28 yen, according to Reuters data, just above a session low of 76.20 yen, which is the lowest since Japanese authorities intervened on October 31 to weaken the Japanese currency.
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