The euro fell for a third straight session against the dollar on Wednesday, with further losses likely, as investors were unconvinced that Friday's European summit would quell concerns about the region's fiscal problems. The US dollar also rose against most of the major currencies, helped by a retreat in oil prices. Lower oil prices tend to help the greenback as it reduces US crude oil imports.
In late Tokyo trading, the euro was down 0.2 percent at $1.3879, retreating further from Monday's four-month peak of $1.4036 on electronic trading platform EBS. That jump in the euro was a carry-over from last week's tough inflation talk by ECB President Jean-Claude Trichet, who surprised markets by flagging a possible rate hike as early as next month. On the charts, George Davis, chief technical analyst RBC Dominion Securities in Toronto, said key Fibonacci levels are currently at play, helping to limit the rally in the euro.
For the long term, Davis cited the 50 percent Fibonacci retracement of the 2008-2010 decline at $1.3960, which is acting as resistance to the euro's advance. On a medium-term basis, there was also the 61.8 percent Fibonacci retracement of the November 2009-June 2010 decline at $1.3898, Davis said, and on a short-term horizon, the 76.4 percent retracement of the November 2010-January 2011 slide at $1.3948. Both levels have also curbed the euro's gains.
In addition, one-month euro/dollar implied volatility edged up on Wednesday, trading at 10.05 percent, from 9.95 percent on Tuesday. That suggested slightly higher expectations of fluctuations in the currency's value. The dollar also rose against the yen, gaining 0.3 percent to 82.80 yen, helped by a generally rising trend in US Treasury yields.
On Wednesday, yields were flat, with two-year Treasuries at 0.729 percent, while 10-year yields slipped to 3.546 percent from 3.555 percent the previous session. Dollar/yen is the currency pair most sensitive to movements in bond yields because both low-yielding units compete as the market's favoured funding currencies for the purchase of risky assets.