The euro fell on Monday and it looked likely to stay under pressure as disappointed investors renewed selling of Italian and other government bonds after a summit aimed at ending two years of crisis in the eurozone. European Union states barring Britain decided on Friday to set stricter budget rules for the single currency area and to provide up to 200 billion euros in bilateral loans to the International Monetary Fund in response to the turmoil.
But uncertainty about the drawn-out process of implementing changes, a lack of emphatic action on cash-starved European banks and the absence of a commitment from the European Central Bank to step up purchases of highly indebted countries' bonds put the euro back under pressure.
It fell around 0.9 percent on the day to $1.3252 on trading platform EBS after triggering stop-loss orders placed under Friday's low of $1.3280, as peripheral bond spreads over German benchmarks widened and equity markets fell. Traders reported option-related demand placed ahead of $1.3250 and further stop-losses lurking below there. The euro is now more than 6 percent below its October peak and 11 percent off its 2011 high of just under $1.50, struck in early May.
The euro was put under added strain late in the Asian session when rating agency Moody's said euro area sovereigns would remain under pressure in the absence of decisive initiatives, with the cohesion of the zone under continued threat. "We expect the euro to head lower as nothing material has come out of the ECB or the EU summit to change the short-term dynamics and the debt crisis is likely to intensify," said Lee Hardman, currency strategist at BTM-UFJ.
Markets were also waiting for a response from Standard & Poor's which, right before Friday's EU summit, warned it may carry out a credit downgrade of eurozone countries en masse if they fail to move decisively to stem the crisis. The euro remained tethered in the $1.3200-$1.3500 band it has moved in since late November while IMM data showed only a small reduction in the speculative short euro base, raising the potential for a short-covering corrective rally.
However, any rebound was most likely to provide better levels to sell the common currency, and on the downside traders said a test of the November low at $1.3210 and then the October trough of $1.3145 was likely. With the euro on the defensive, the dollar index rose 0.7 percent to 79.158, and the greenback was up 0.6 percent against the Swiss franc at 0.9302.