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Euro resumes fall on debt concerns, Korea

LONDON - The euro hit a two-month low against the dollar on Wednesday as an earlier recovery fizzled out due to worries the euro zone debt crisis will spread and on renewed concerns about Korean tensions.

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Spreads between peripheral government bond yields and their German counterparts widened while a North Korean statement in the wake of Tuesday’s artillery clash that the South’s action was driving the peninsula to the brink of war prompted investors to seek safe-haven currencies.

This pushed the dollar to a two-month high against a basket of currencies, while the focus on troubles in the euro zone periphery meant the euro quickly shrugged off a record high German Ifo business climate index for November.

Many uncertainties remained over whether the crisis in Ireland would be resolved, particularly given political tensions in the country, while worries intensified that the crisis could spread to Portugal or even Spain.

“The risk is still to the downside and the euro is very vulnerable due to the Irish crisis and worries about whether Portugal will be next in line,” said Niels Christensen, currency strategist at Nordea in Copenhagen.

Standard and Poor’s downgraded its sovereign rating on Ireland, which will later unveil a budget plan explaining how it plans to save 15 billion euros over the next four years.

The euro was down 0.5 percent at $1.3305, having hit a two-month low of $1.3284, according to Reuters data, and broken below its 100-day moving average. It resumed losses after a fall of nearly two percent on Tuesday.

The euro may be set for a re-test of $1.3232, a 61.8 percent retracement of its August-November rally, before $1.3000.

The euro fell to a two-month low against the yen, which also benefited, along with the dollar and the Swiss franc, from investors seeking safe haven-assets.

“Portugal and Spain spreads are widening,” a London-based trader said. “Real money are selling out stale longs built up over summer. We are just accelerating as this crisis is going to run for a while longer.”

Risk Aversion

The dollar index rose 0.2 percent to a high of 79.995, its strongest in two months.

The dollar gave a muted reaction to minutes from the Federal Reserve’s last policy meeting that showed officials considered even more drastic options to boost growth before it settled on buying $600 billion in Treasuries., with its 55-day moving average, now at 82.74, seen as a floor.

Traders said market liquidity was lighter than usual ahead of a US market holiday on Thursday.

The Australian dollar was up 0.4 percent from late US levels to $0.9771, recovering from Tuesday’s fall to a four-week low of $0.9708 though well off highs of $0.9818.

“The Australian dollar is one of the few currencies people still like to hold, given strong economic fundamentals,” Nordea’s Christensen said.