By Myra P. Saefong and William L. Watts, MarketWatch
SAN FRANCISCO (MarketWatch) — The euro tumbled to a seven-week low versus the dollar and touched record-low territory against the Swiss franc Monday on fears that Europe’s debt crisis could engulf Italy.
“Fears over Italy are likely to intensify in the days ahead, and the [European Union] may step up its efforts to address the sovereign-debt crisis given the heightening risk for contagion,” said David Song, currency analyst at DailyFX, in emailed comments.
Top officials of the European Council, the European Central Bank and the European Commission met Monday ahead of a gathering of euro-zone finance ministers in Brussels. Read more on emergency euro-zone meeting.
“As the group of European finance ministers convenes in Brussels over the next two days, policy makers will certainly make an attempt to talk down the risks for the region,” said Song. But “the sharp decline in [the] euro is likely to gather pace over the near term as the European periphery continue to face record-high financing costs.”
The euro EURUSD -1.29% extended a slide to trade at $1.4045 versus the dollar, down from $1.4247 in late North American trading on Friday. It touched a low of $1.4024, the lowest level since late May. See real-time currency quotes and tools.
Against the yen, the euro EURJPY -1.47% bought ¥112.95, down from ¥114.90 late Friday. And the euro EURCHF -1.75% fell to 1.1722 Swiss francs, a decline of 1.4% from Friday and a fall below the previous all-time low at around 1.1806 francs, according to RBC Capital Markets.
Italian-government-bond yields and the cost of insuring Italian debt against default extended sharp rises seen Friday, advancing into territory unseen since the launch of the euro in 1999. Read more: Italy bond yield rise pressures European leaders.
The euro also faces downside risks against the yen because of Japanese investors’ large holdings of Italian sovereign bonds. Read more on Japan's Italian bond holdings.
“If the Italian bond market continues to fall, Japanese investors may need to sell Italian bonds, which in turn is likely to be negative” for the euro against the yen, Tohru Sasaki, head of Japan rates and foreign-exchange research at J. P. Morgan Chase in Tokyo, said in a note to clients Monday.
Fears over Europe’s sovereign-debt woes pressured European equities and weighed on U.S. stocks, fueling gains for the dollar and other safe-haven currencies, analysts said. Read about the sell off in U.S. stocks.
The dollar index DXY +1.15% , which measures the U.S. unit’s value against a basket of six other major currencies, traded at 75.973, up from 75.179 late Friday.
Against the Japanese yen, the dollar USDJPY -0.14% bought ¥80.44, down from ¥80.65 late Friday.
Japan holdings of U.S. debt
Japanese investors are also major buyers of U.S. debt, so the yen is sensitive to changes in U.S interest rates. Lower rates make foreign investors less inclined to buy U.S. debt, and rates dropped after a disappointing jobs report. Read story on falling U.S. bond yields.
The dollar’s upside was also limited by concerns about the impasse on the U.S. debt ceiling. A Sunday meeting between U.S. President Barack Obama and congressional leaders ended earlier than some had expected, with talks scheduled to resume Monday. Read more on U.S. debt impasse talks.
“News over the weekend that talks over the U.S. budget deficit and debt ceiling broke down as Republicans pulled out of discussions will leave [dollar] bulls with a sour taste in their mouth,” Mitul Kotecha, head of global foreign-exchange strategy at Credit Agricole, said in a note to clients Monday.
The greenback also gained against the British pound GBPUSD -0.80% , which bought $1.5912 compared with $1.6037 late Friday. It also rose against the Australian dollar AUDUSD -0.91% , which was changing hands at $1.0670, down from $1.0748.
