NEW YORK: The euro fell a from two-week high against the dollar on Monday on concern the euro zone debt crisis could engulf European nations as yet relatively unscathed, with the economic outlook and rising political risks likely to keep it under pressure.
Analysts said sentiment towards the common currency was bearish, with most investors looking to sell it on any rally before debt auctions this week in Italy and the Netherlands.
The Dutch government was on the verge of collapse after it failed to agree on budget cuts, while Italian bond yields surged as did French borrowing costs after Socialist Francois Hollande - who has promised to renegotiate a European budget pact - won the first round of France's presidential poll.
"The euro is weaker amid increasing political uncertainty, specifically in Netherlands and France," said Eric Viloria, senior currency strategist at Forex.com. "The failure of Dutch austerity talks suggest that early elections are likely and bring into question the AAA status of the country - one of the last few remaining in the euro zone."
The euro fell 0.7 percent to $1.3127, holding below Friday's peak of $1.3226, according to Reuters, which was logged after a near 1 percent rally in the week, its best since late February. It hovered just above near-term support at its 100-day simple moving average currently at $1.3118.
The euro was also pressured by data showing German manufacturing unexpectedly shrank at its fastest pace in nearly three years in April. A contraction in manufacturing and services also deepened in the euro zone as a whole.
"It has not been a great start for the week for the euro with German PMI numbers adding to the worries stemming from the political risk factors," said Jeremy Stretch, head of currency strategy at CIBC World Markets in London.
"If bond spreads continue to widen and stock markets come under more pressure, we could see the euro drop towards $1.3050 rather than head towards $1.3250 in the near term."
Many market participants expect the euro to trade in a range between $1.3000 and $1.3300, with worries about feeble euro zone growth likely to dominate sentiment. But analysts said the euro could fall sharply once it makes a sustained break below strong chart support at $1.30.
"The euro has been above $1.30 for three months now, so a move under $1.30 could bring some more participants in," said Chris Turner, head of currency strategy at ING in London.
ING forecasts the euro will fall to $1.20 by the end of the second quarter.
The euro, which lost more than 1.2 percent against the yen , gained no support from a weekend deal to double the International Monetary Fund's firepower to contain the debt crisis.
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