Investors speculate more euro zone countries may be downgraded in the near term
The euro slumped to an 11-month low against the dollar on Wednesday, as investors speculated that more euro zone countries may be downgraded in the near term given that a quick solution to the region's debt crisis remains elusive.
Market participants also drove the single currency lower against the yen and sterling ahead of an Italian bond auction later in the day.
Poor demand at the sale may send 10-year Italian bond yields towards lifetime highs, after they have already climbed above 7.0 percent a level considered to be unsustainable.
The euro fell as low as $1.3005, its weakest since early January. Investors dumped the single currency for the safety of the dollar, which jumped to its highest level since January versus a currency basket.
The euro quickly bounced back to around $1.3040, after a further fall was cushioned by hefty bids from an Asian sovereign name, according to traders. More bids were seen around the psychologically key $1.30 level and below.
Market participants also cited hedging-related demand from European corporates as preventing more losses, but analysts argued the single currency may take a further pummeling if investors become more pessimistic about the euro zone's health.
"There's definitely strong support around $1.30, and also in the $1.30-1.29 region," said Arne Lohmann Rasmussen, chief analyst at Danske in Copenhagen.
"But if we get a further deterioration of the euro zone debt crisis, if we see a lot of countries being downgraded, or more problems in the banking sector, this $1.30 is not going to hold."
Markets were braced for a possible mass downgrade of euro zone countries, which would deepen the region's debt crisis, after last week's key summit offered no hopes for an immediate resolution.
Speculation is rife that a downgrade for France could come any day.
The single currency fell to 101.44 yen, its weakest since early October, while hitting a nine-month low of 83.92 pence.
Market participants said a fall below $1.30 in euro/dollar may increase its downward momentum due to options-related selling.
"If we do go below, options players are again likely to exacerbate the move as they scramble to cover lost gamma," Citi analysts said in a Citi FXWire note.
But they added: "More options barriers are reported at $1.2950 and in size at $1.2900. The 2011 low at 1.2855 offers key support below there."
The dollar index, which tracks the dollar's value against a currency basket, rose as high as 80.407.
Investors picked up the US currency, considered a safe haven given its vast liquidity, after the Federal Reserve on Tuesday warned that turmoil in Europe posed a big risk to the US economy.
The US central bank refrained from boosting its easing measures this month, as expected.