The euro slid more than 1 percent against the dollar on Monday, suffering its worst one-day drop since November on mounting concerns that Greece will be forced to restructure its debt. Rampant risk aversion generally weighed on the eurozone's single currency even as Standard & Poor's revised its outlook on the United States' long-term rating to negative from stable but affirmed its 'AAA/A-1+' sovereign credit rating.
An actual ratings downgrade of US debt would be negative for the US dollar, but most believe S&P's announcement was a warning and, therefore, it did little to rattle the greenback's performance against the euro. In late afternoon New York trading, the euro was down 1.4 percent at $1.4224, with the session low at $1.4155 - a two-week low - according to Reuters data. It was the biggest fall since a 1.86 percent decline on November 23.
Benchmark volatilities for one month at-the-money options on the euro versus the dollar rose to 10.30 percent on Monday from 9.4 percent on Friday as spot fell to a two-week low. Implied vols on euro/yen, the biggest mover among major currency pairs, also surged, trading as high as 14.25 percent, a level not seen since March 18, according to Reuters data.
While US fiscal tensions are increasing, the United States is far from defaulting on its debt. "The key takeaway from the S&P announcement is that the US has been put on notice, but no ratings action is likely until 2013," said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman in New York.
"With no one expecting any serious progress on deficit reduction until after the 2012 election, S&P seems to be simply firing a shot across the bow to US policymakers," he said. "Continued concerns about America's bloated deficits and policymakers' inability to agree on the difficult measures needed to address budgetary challenges remain a key risk for the dollar," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
German government sources said they expected Greece will not make it through the summer without debt restructuring, although Athens denied a debt rescheduling was imminent. Earlier, a Greek newspaper reported that Greece had told the IMF and the European Union this month it wants to restructure its debt. Greek debt pared losses as a finance ministry source in Athens said the story was untrue.
The euro fell to its lowest in almost three weeks against the yen. It last traded at 117.64 yen, down 1.9 percent. The negative skew on one-month euro/dollar risk reversals, a rough gauge of positioning and currency sentiment, has also deepened to -1.68 vols on Monday from -1.4 vols last Friday.
This reflected renewed concerns about the eurozone's fiscal debt problems given persistent talk of Greece's possible debt restructuring. The dollar also hit its lowest in almost three weeks against the yen to around 82.16 yen, before recovering to 82.64 yen, down 0.6 percent for the day. The US dollar index, which tracks the dollar against a basket of currencies, jumped to 75.502, a 0.9 percent gain.