The euro sank to its lowest in 16 months against the dollar on Wednesday, weighed down by persistent talk of an imminent cut to France's triple-A rating and a warning from Fitch about a collapse of the single currency if the European Central Bank does not step up its bond purchases.
Renewed speculation about a French downgrade reminded investors that the three-year-old euro zone debt crisis is not solely confined to the region's peripheral economies, but has affected Europe's core nations as well. However, a senior French source told Reuters on Wednesday that France has not been informed of any forthcoming downgrade to its credit rating, and that eased selling of the euro a bit.
Adding to the euro's bearish tone were comments from Fitch ratings agency's head of sovereign ratings that the ECB should ramp up its buying of troubled euro-zone debt to support Italy and prevent a "cataclysmic" collapse of the shared currency. "The euro is on the backfoot once again because of the French downgrade rumours and then we got the Fitch warning," said Dean Popplewell, chief currency strategist at OANDA in Toronto.
Investors are focused on a slew of eurozone events that could dictate where the currency is headed. Spain on Thursday will sell up to 5 billion euros of 2015 and 2016 paper, just hours before the ECB's first monetary policy announcement and interest-rate decision for 2012. Italy offers up to 4.75 billion euros of five-year bonds on Friday. The euro temporarily jumped to around $1.2730 after German Chancellor Angela Merkel said Germany would be prepared to supply more capital to the European Stability Mechanism fund when it is launched later this year.
The bounce did not last. The euro slumped to a 16-month low of $1.2661, according to Reuters data. In late afternoon New York trading, the euro was at $1.2704, down 0.5 percent on the day. "The Fitch news rattled the market, and Merkel's comments offset that temporarily, but overall, the main focus remains on this week's ECB meeting and debt auctions," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
According to a Reuters poll of economists, the worst is yet to come in the eurozone's debt crisis, but the currency union will survive 2012 intact. They also said France will probably lose its top-notch credit rating. While just nine of the poll's 64 economists said the bloc had turned the corner on the sovereign debt crisis, only 10 said the euro zone would not survive the year in its current form. The rest were reasonably confident it would.
The euro struggled versus the Australian dollar, setting a record low of A$1.2347. Against the yen, the common currency fell 0.6 percent to 97.628, not far from an 11-year low of 97.28 yen set on Monday on EBS. The dollar edged up against the yen to 76.890 yen, staying above a two-month low of 76.30 yen hit last week.