By Myra P. Saefong and William L. Watts, MarketWatch
SAN FRANCISCO (MarketWatch) — The euro plunged Tuesday, pressured by concerns over a potential spreading of Europe’s debt crisis, but the currency found enough support from a successful Italian-bond auction to trade above a four-month low it hit against the U.S. dollar.
The euro EURUSD -0.42% dropped through the $1.40 level to trade as low as $1.3836, according to FactSet Research, its lowest level in nearly four months.
In recent action, the euro changed hands at $1.3992, down from $1.4045 in late North American trading on Monday. See real-time currency quotes and tools.
The dollar index DXY +0.19% , which measures the U.S. unit’s performance against a basket of six major currencies, stood at 76.435, up from 75.941 late Monday.
“European policy makers set out to avoid a technical default,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, in a research note. Euro-zone finance ministers met on Monday and finance ministers from all 27 European Union nations are meeting Tuesday in Brussels.
In a statement late Monday, the finance ministers said they stood ready “to adopt further measures that will improve the euro area’s systemic capacity to resist contagion risk,” but they didn’t take any action. Read more about the Eurogroup’s statement.
Options include increasing the size and flexibility of the euro-zone rescue mechanism, known as the European Financial Stability Facility, and lengthening the maturities of loans and lowering interest rates for bailed-out countries, the statement said.
But the finance ministers didn’t offer any confidence in terms of “how the peripheral debt story would play out beyond the very short term and any confidence that the private sector in the affected countries would fund even a breath of stimulus,” Englander said.
Against this backdrop, Italy still managed to sell 6.75 billion euros ($9.4 billion) in 12-month bills amid respectable demand, albeit at higher yields. Read the pulse about the Italian bond auction.
The news helped the euro bounce back from Tuesday’s lows.
For now, “it still seems likely that the euro theme will be short-term bursts of buying based on hopeful policy announcements and medium-term deterioration based on disappointment in economic, fiscal and political outcomes,” said Englander.
Signs of contagion
Also Tuesday, Italian and Spanish government bond yields continued a sharp rise in a sign that contagion has spread to the euro zone’s third- and fourth-largest economies, respectively.
The euro continued to hit fresh all-time lows against the safe-haven Swiss franc EURCHF -0.71% and remains down 0.6% at 1.1663 francs.
Against the Japanese yen, the euro EURJPY -1.36% bought ¥111.32, down from ¥112.74 late Monday. The euro EURGBP -0.37% fell 0.3% on the British pound to trade at 87.98 pence.
