By Sue Chang and Deborah Levine, MarketWatch
SAN FRANCISCO (MarketWatch) — The euro on Tuesday skidded to its lowest level against the dollar in almost a month as the Greece prime minister’s decision to seek a referendum on the country’s latest bailout fueled fears that the European debt crisis could spiral out of control.
“We are all in utter despair at the way Europe’s political leaders dream up new ways to disappoint us,” said Kit Juckes, head of foreign exchange strategy at Societe Generale.
The euro EURUSD -1.09% plunged to $1.3675 from $1.3908 in late North American trading Monday.
However, the currency recovered from earlier lows after newly released data showed that activity in the U.S. manufacturing sector slowed in October.
Against the Japanese yen, the shared currency EURJPY -0.93% fell to ¥107.07 versus ¥108.56 Monday.
The dollar index DXY +1.13% , which measures the greenback against a basket of six major currencies, rose to 77.354 from 76.243 late Monday. The index had traded higher before the ISM data were announced.
The closely-watched ISM manufacturing gauge dropped to 50.8% in October from 51.6% in September. The latest number is weaker than the 52.1% forecast by economists in a MarketWatch survey. Read about the ISM gauge
The Greek government caught investors off guard Monday, announcing it would hold a referendum on the latest bailout, which is expected in January. Prime Minister George Papandreou’s government will also face a confidence vote later this week, which he is expected to survive.
But the referendum is viewed as a high-stakes gamble aimed at shoring up support for further austerity measures and efforts to liberalize the economy, economists said. A “no” vote, however, runs the risk of setting the stage for Greece’s exit from the euro, while the turmoil surrounding the vote has put renewed pressure on European bond markets. Read more on Greek referendum.
“This latest development has further undermined confidence in the euro zone’s ability to reach an agreement amongst member states when individuals act unexpectedly and unilaterally, to say nothing of the potential systemic risks,” said Sue Trinh, senior currency strategist at RBC Capital Markets.
The renewed turmoil comes less than a week after European leaders inked what was billed as their latest comprehensive effort to contain the euro-zone debt crisis.
“The immediate question for markets will be how this changes the status of the sixth tranche of the first bailout package, without which Greece will run out of money within weeks,” said Adam Cole, global head of foreign-exchange strategy at RBC Capital Markets. “Core euro-zone members have offered no guidance on this as yet, though it is not inconceivable that the payment could be made, even with the uncertainty of a referendum overhanging.”
Greece’s action also weighed on Italian debt prices, sending yields up sharply. Investors fear that divisions within Prime Minister Silvio Berlusconi’s ruling coalition will hamper efforts to cut the nation’s debt load, which is second only to Greece in the euro zone when measured as a proportion of the country’s economy.
“Markets will heap the pressure on Italy until it starts to move quickly on fiscal and growth reforms,” said Kathleen Brooks, research director at Forex.com. “The markets want firm action now and if Berlusconi can’t deliver that, then the bond vigilantes will keep the pressure on him until he is gone.”
The euro briefly fell under a technical support level at $1.3630, and below that the next support is near $1.31, Brooks said.
British pound, Japanese yen
The British pound GBPUSD -0.86% fell 0.7% to $1.5948.
A preliminary estimate of third-quarter British gross domestic product showed the economy expanded by 0.5% in the third quarter, slightly stronger than forecasts for 0.4% growth. Read about third-quarter U.K. GDP.
But a purchasing managers index for the manufacturing sector showed an unexpected contraction in activity in October. See more on British manufacturing PMI.
Meanwhile, the dollar traded relatively flat against the yen, a day after Japanese officials intervened in currency markets to weaken the yen.
The dollar USDJPY +0.16% traded at ¥78.27, up from ¥78.05 late Monday.
Japan intervened in currency markets for the third time this year on Monday in a bid to weaken the yen and ease the impact of a strong currency on the export-dominant economy. Read analysis on the yen intervention.
The Reserve Bank of Australia also cut the official cash rates by 25 basis points, or a quarter percentage point, to 4.5%. Read more on Australia’s rate cut.
The Australian dollar AUDUSD -1.85% fell 1.9% versus its U.S. counterpart, as investors shied away from risk-associated assets to trade at $1.0332.
Sue Chang is a MarketWatch reporter in San Francisco.
William Watts in Frankfurt contributed to this report.
