The euro came under pressure against the dollar on Wednesday as comments from Ben Bernanke, chairman of the Federal Reserve, raised concerns concerns over eurozone bank funding.
Mr Bernanke said swap lines that were reinstated by the Fed to provide dollar funding to Europe as the Greek fiscal crisis escalated, played an important part in stabilising markets but would not last forever.
Analysts said the rise in three-month dollar Libor, the benchmark inter-bank lending rate, supported the hypothesis that European banks were struggling to access funding in dollars.
“A shortage of dollar liquidity is being increasingly reflected in the sharp rise of dollar Libor and this is expected to get worse as the month-end approaches with pressures in money markets likely to build over the coming days,” said Hans Redeker at BNP Paribas.
He said the Fed swap lines had not provided any comfort given the high penalty rate charged for the funds.
“While the market was hoping that the rates on this facility would become more favourable, Mr Bernanke has been reminding the market that the dollar swap lines are not a permanent service,” said Mr Redeker.
Heightened worries over eurozone bank funding helped to erase a rally in the euro prompted by a late surge in US stocks on Tuesday, which weighed on haven demand for the dollar.
The euro fell 0.5 per cent to $1.2306 against the dollar, just over a cent above the four-year low of $1.2142 it hit last week, dropped 0.6 per cent to Y111.06 against the yen and eased 0.4 per cent to £0.8536 against the pound.
Meanwhile, concerns over the eurozone banking system helped to keep risk appetite elevated on the currency markets, helping to support haven demand for the dollar and the yen.
The dollar rose 0.3 per cent to $1.4403 against the pound, held steady around a one-year high at SFr1.1535 against the Swiss franc and was little changed close to 10-month high at $0.8291 against the Australian dollar.
The dollar eased 0.1 per cent to Y90.26 against the yen, however, as the Japanese currency continued to benefit from the recent rise in market turmoil.
Elsewhere, the Norwegian krone advanced after the Organisation for Economic Co-operation and Development said Norwegian interest rates needed to rise further to keep inflation under control.
The Norwegian central bank, one of the few to raise interest rates since the financial crisis, last tightened monetary policy by 25 basis points to 2 per cent on May 5.
The Norwegian krone rose 0.6 per cent to NKr6.5105 against the dollar and climbed 1.1 per cent to Nkr8.0140 against the euro.
