The euro wallowed near 11-month lows against the dollar on Wednesday and crept close to an option barrier whose break could rapidly speed up its decline, with an Italian bond sale coming into focus later in the day. After the Federal Reserve refrained as expected from boosting its easing programme at a meeting on Tuesday, euro bears felt free to end weeks of deadlock and pummelled the currency to as low as $1.3009, a level not seen since mid-January.
Piling more pressure on the embattled currency, German leader Angela Merkel rejected any suggestion of raising the funding limit of Europe's future bailout fund, the European Stability Mechanism, sources said. A spike in Italian bond yields above 7 percent for the first time in two weeks also soured the mood.
In Asia, the euro licked its wounds at $1.3030, with large bids a bit above $1.3000 to hedge an option barrier at that level preventing further selling. Traders mentioned one more barrier at $1.2980 and said if both gave way the euro's decline might dramatically pick up steam.
"There's some buying on dips and option-related bids stabilising the euro today, but the bearish trend is by no means over. By the beginning of 2012 it's likely to drop to around $1.25," said Koji Fukaya, chief FX strategist at Credit Suisse. The common currency has held up remarkably well despite extreme volatility in the eurozone bond market, but the break of a stalwart support point around $1.32 has raised the risk of a quick move to the 2011 trough hit on January 10 at $1.2860.
The market's focus is turning to an Italian bond sale later on Wednesday, and another by Spain on Thursday. The danger of a credit ratings downgrade may keep borrowing costs punishingly high for both, traders said. The euro's woes saw the dollar index power to an 11-month high of 80.395. It last eased to 80.277, but stood well clear of a major support at the top of the weekly Ichimoku cloud at 79.50. The greenback held steady against the yen at 77.97 yen, having briefly popped above the 78 yen line for the first time since December 5. The Australian dollar hovered around parity versus the dollar. It was last at $1.0015, with support at $0.9938, a 61.8 percent retracement of the November 23 to December 8 rally.