The euro got off to a rocky start on Monday, with its weakness gathering pace after a series of political setbacks in Europe over the weekend prompted a flight to safety.
The euro lost about 1% on the day to $1,3666
and fell 0,7% to ¥105,12 as investors reacted badly to an unproductive European Union meeting in Poland.
A cancellation of a visit by Greek Prime Minister George Papandreou to the United States to chair an emergency meeting and a regional election defeat for Germany’s chancellor Angela Merkel added fuel to an already tense euro.
"What happens this week? The euro is going to come under pressure — as it already has this morning," said Rob Ryan, FX strategist at BNP Paribas in Singapore.
Policymakers from the European Union (EU) and the International Monetary Fund (IMF) will probably approve the next tranche of aid for Greece in the end, "but in the meantime the uncertainty is weighing heavier and heavier," Ryan said.
With a two-day US Federal Reserve policy meeting looming ahead on Tuesday and Wednesday, the euro may manage to hold above last week’s seven-month low in the near-term, he added.
The euro dipped briefly below its support level near $1,3664, the 61,8% retracement of last week’s rally to $1,3937 from a seven-month trough of $1,34949 on trading platform EBS.
The next Fibonacci support lies near $1,3599 the 76,4% retracement of the same rally, with more support at its Sept. 14 intraday low near $1,3590.
Market talk that an Asian sovereign account sold the Australian dollar and the euro helped push the greenback higher this morning.
"This week will be another good one for the USD with weakness in euro, pound and Aussie," said Joseph Capurso, currency strategist at Commonwealth Bank of Australia.
Capurso expected the single currency to fall to $1,3200-$1,3300 this week.
The dollar outperformed against major currencies after the Swiss franc lost some lustre as a safe haven currency ever since the Swiss National Bank committed to using unlimited currency intervention to maintain a minimum euro/Swiss franc exchange rate of 1,20 francs, while the yen continues to be dogged by the danger of more intervention.
The dollar rose broadly, edging up 0,2% against the yen to ¥76,93 and climbing 0,7% versus the Swiss franc to 0,8822. The greenback’s rise knocked sterling down to an eight-month low of $1,5685 .
Commodity currencies were also under pressure with the Australian dollar sliding 1,2% to $1,0236.
CBA’s Capurso anticipated the Aussie to test $1,0000 by the end of the week. The Australian dollar broke above parity in March and only dipped under it for a few hours in August, when it bottomed at $0,9927.
Trading is likely to be thinner than on Monday as Japan is closed for a holiday.
The US Federal Reserve begins a two-day policy meeting on Tuesday amid talk it will take further monetary easing measures, such as lengthening the maturity of its debt holdings, an option market players refer to as "operation twist".
Although the Fed is unlikely to adopt a fresh asset-buying programme at its meeting this week, any signal that it will expand its balance sheet further if data continues to disappoint could provide some support to risk appetite in coming weeks, said Ryan at BNP Paribas.
"However, if ‘Operation Twist’ is all we get, then I think the likelihood of risk appetite breaking down over the next few weeks is pretty high," Ryan said.
