The euro fell to just shy of a 16-month low against the dollar on Wednesday after Fitch ratings agency said the European Central Bank should do more to tackle the region's debt crisis.
With investors wary before a European Central Bank meeting and Spanish and Italian debt sales later in the week, the comments were enough to send the euro lower after a brief bout of profit-taking on hefty short euro positions.
A senior Fitch official told Reuters that the ECB should ramp up buying of troubled euro zone debt to support Italy and prevent a "cataclysmic" collapse of the euro.
The euro fell more than half a percent to hit a session low of $1.2681, coming close to a 16-month trough of $1.2666 set on Monday after stop loss orders were reportedly triggered around $1.2720 and $1.2700.
"There are plenty of events coming up that the market is preparing for and the Fitch headline didn't help. The euro is obviously vulnerable to a move lower, and in the near term a move to the $1.26 target is quite possible," said Jennifer Hau, G10 currency strategist at Lloyds.
"Unless it breaks significantly higher, which you would need positive news for, then it's hard not to maintain a selling bias while the euro is below $1.29/$1.30".
Comments from German Chancellor Angela Merkel that Germany would be prepared to pay more capital into the ESM (the euro zone's permanent rescue fund) in order to give a message to markets helped the euro to recover slightly to $1.2730.
Traders also cited talk of bids below $1.2700 and an option barrier at $1.2650 that may temporarily help stem the euro's falls, but they saw a risk of further falls as investors look for any excuse to sell the currency on rallies.
"The market has been really bearish on the euro and looking for a reason to go short," said Amit Patel, a trader at ETX Capital.
Another trader said the euro's failure on Tuesday to break above $1.2820 was a clue that the short-squeeze in the euro may not last.
A German auction of five-year debt, which saw good demand, provided little support to the euro. Germany sold €3.153bn of new five-year 0.75 percent Bobl notes on Wednesday, drawing more demand than in a previous auction in December.
Investors will now focus their attention on Spain, which sells up to €5bn of 2015 and 2016 paper on Thursday, hours before a European Central Bank rate decision. Italy offers up to €4.75bn of five-year bonds on Friday.
Although Italian bond yields dipped below the critical 7 percent level seen as unsustainable on Wednesday, analysts said the euro would be vulnerable to concerns the debt crisis will intensify in coming weeks as sovereigns refinance.
"Even if Italy gets away a good chunk of its debt over the next couple of weeks it's the financing of this debt at current market rates that is going to be the killer going forward," said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi.
Market players were reluctant to initiate big trades before a European Central Bank meeting on Thursday, which may weigh further on the euro. Policymakers are expected to keep rates on hold at 1 percent and strike a downbeat tone as they press governments to step up their efforts to tackle the debt crisis.
The euro struggled versus the Australian dollar, hitting a fresh record low of A$1.2347. Against the yen, the common currency fell 0.3 percent to 97.88, not far from an 11-year low of 97.28 yen set on Monday on EBS.
The Australian dollar slipped 0.15 percent against the U.S. currency at $1.0291 having rallied over the previous two days. The Aussie rose as high as $1.0352 on Tuesday, 2 percent up from Monday's low of $1.0145.
The dollar rose 0.1 percent against the yen to 76.94 yen , staying above a two-month low of 76.30 yen hit last week.For all the latest currencies and forex rate news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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