The euro fell broadly on Monday as hopes for an immediate increase in the eurozone's bailout fund faded and investors reassessed a recent rise in European Central Bank interest rate expectations. Uncertainty about whether Germany would support an increase in the effective lending capacity of the safety fund, known as the European Financial Stability Facility (EFSF), put pressure on the euro ahead of a meeting of eurozone finance ministers.
The subject is expected to dominate the talks. Trading light as US markets shut for holiday The euro traded at $1.3290, down 0.65 percent on the day after falling to as low as $1.3243 on trading platform EBS. It was off a one-month high of $1.3458 hit on Friday when some speculators went long on the euro following solid debt auctions by Spain and Portugal and hawkish comments on inflation from European Central Bank President Jean-Claude Trichet.
Hopes that eurozone policymakers may expand the rescue fund swiftly had fed into that too, but German Finance Minister Wolfgang Schaeuble said on Monday that there was no urgent need for a decision. Senior European sources told Reuters the sense of urgency in Berlin for boosting the fund had diminished after the successful bond auctions in Spain and Portugal, the two countries seen most at risk of needing any further bailouts.
Instead Germany is pushing for broader anti-crisis measures to be agreed at a summit of European Union leaders in March. "It's becoming increasingly apparent that Germany doesn't want an increase in the rescue fund and that's weighing on euro sentiment today because there were positive expectations building last week," said Manuel Oliveri, currency strategist at UBS in Zurich.
Spain on Monday cancelled a proposed bond auction slated for later in the week, opting for a syndicated bond issue instead, unnerving investors and providing another reason to sell the euro as peripheral bond spreads widened over German benchmarks. Latest data showed the ECB spent 2.3 billion euros buying government bonds, its highest amount in over a month as it sought debt markets in struggling issuers.
ECB policymaker Athanasios Orphanides added to the pressure on the euro by playing down the bank's language from last week, when markets took the bank's warnings on inflation and Trichet's on previous rate rises as a sign it could move sooner than previously thought. The three-month Euribor rate - traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending - rose to 1.009 percent on Monday from 1.006 percent.
The dollar was up against a currency basket at 79.32. But trading conditions were thin due to a US public holiday. It saw little reaction to comments from top Federal Reserve official Charles Plosser who did not rule out a 2011 rate rise. The dollar was down on the yen, easing to 82.60 yen, and within its well-worn range of the past few weeks.
The yen was also stronger against the euro with the single currency shedding nearly 1 percent against the Japanese unit. The euro was down 0.94 percent at 109.91 yen. Sterling advanced to a eight-week high against the dollar, bolstered by rising speculation the Bank of England could raise interest rates as early as June. The pound rose as high as $1.5955, its strongest since late November, moving past option barriers at $1.5900.