July 11 (Bloomberg) -- The euro fell to a two-week low against the dollar and yen on concern that Europe's sovereign- debt crisis may spread to Italy as policy makers remain divided on how to structure aid for Greece. The euro dropped against most major peers after Die Welt reported that the European Central Bank is seeking to expand a fund to include help for Italy, following a coordinated rescue for Greece by the European Union and International Monetary Fund. Higher-yielding currencies including Australia's dollar weakened on speculation China will take further action to cool growth. Malaysia's ringgit declined after a report showed industrial production slid for a second month. "Italy is a very large economy, and if indeed we do see contagion spread toward Italy, then the ECB, EU and IMF will need to come up with a totally different plan to deal with it," said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd. in Wellington. "Ongoing sovereign concerns are proving to be a real drag on the euro." The 17-nation euro fell to $1.4188 as of 1:45 p.m. in Tokyo from $1.4265 on July 8, after earlier touching $1.4183, the lowest level since June 27. It slid 0.4 percent to 114.58 yen and touched 114.40 yen, also the least since June 27. The dollar traded at 80.76 yen from 80.64 last week. The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against those of six trading partners, rose to 75.438 from 75.179, and reached 75.451, the strongest since June 28. Enlarged Meeting A regular meeting of EU President Herman van Rompuy and Commission President Jose Manuel Barroso will be enlarged to include ECB President Jean-Claude Trichet, Luxembourg Prime Minister Jean-Claude Juncker and European Economic Commissioner Olli Rehn, said Jesus Carmona, a spokesman for Van Rompuy, in a phone interview yesterday. That will precede a monthly gathering of euro-area finance ministers. The yield on Italy's 10-year bond rose to a nine-year high of 5.27 percent on July 8, driving the premium over German bunds to a euro-era record of 244 basis points. The bailout fund may have to be doubled to 1.5 trillion euros ($2.13 trillion) to cover a crisis in Italy, the ECB said, according to the German newspaper Die Welt. The Financial Times cited unidentified senior officials as saying European leaders are prepared to accept that Greece should default on some of its bonds. U.S. Earnings "The news around Greece is not good -- it implies that any bailouts that may be required elsewhere could be given the same treatment, which makes sovereign bonds in those countries look less attractive," said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. "We're waiting on meetings of EU ministers, but it's hard to imagine them coming out with anything that will be supportive." The dollar traded 0.3 percent from its lowest in more than a week against the yen before U.S. companies start to report earnings amid signs that the world's largest economy is slowing. "The market wants to confirm if what's happening in the U.S. economy is a slowdown," said Junichi Ishikawa, a Tokyo- based market analyst at IG Markets Securities Ltd. "Corporate earnings will be closely watched to examine the health of the economy. The bias is for the dollar to weaken against the yen." Alcoa Inc., the largest aluminum producer in America, will become the first company on the Dow Jones Industrial Average to report second-quarter earnings today. Corporate profits are forecast to have grown by 13 percent in the period, according to analyst estimates as of July 9 compiled by Bloomberg, the smallest gain in two years. Fed Minutes The U.S. trade deficit widened in May to $44.1 billion from a revised $43.7 billion gap in the prior month, according to the Bloomberg survey median before tomorrow's Commerce Department data. The unemployment rate unexpectedly increased to 9.2 percent, the highest level this year, Labor Department data showed last week. The Federal Open Market Committee is scheduled to release tomorrow the minutes from its June 21-22 meeting. Policy makers decided then to keep record stimulus and Fed Chairman Ben S. Bernanke said the economy is recovering at a "moderate pace." The Australian dollar fell for a second day on speculation China, its largest trading partner, will increase efforts to tame inflation even as growth cools. China's consumer price index increased 6.4 percent in June from a year earlier, the National Bureau of Statistics said on July 9, exceeding the 6.2 percent median estimate of economists surveyed by Bloomberg. The government will say on July 13 that gross domestic product rose 9.3 percent in the second quarter from a year before, according to a separate survey, down from 9.7 percent the previous quarter. Malaysia Output "Fears of a possible slowdown in China and also the U.S. are spurring risk aversion and driving the Aussie lower," said Jim Vrondas, a manager at the online currency dealer OzForex Ltd. in Sydney. The China data "makes it more likely that officials will keep tightening." The MSCI Asia Pacific Index of stocks fell 1 percent. The Aussie dollar slipped 0.4 percent to $1.0714. Malaysia's ringgit retreated from a two-month high as data today showed industrial output slid 5.1 percent from a year earlier in May following a revised 1.7 percent decline in April. The ringgit fell 0.5 percent to 3.0055 per dollar after touching 2.9865 on July 8, the strongest level since May 12. --With assistance from Kristine Aquino in Singapore and Elffie Chew in Kuala Lumpur. Editors: Garfield Reynolds, Rocky Swift

Source