By William L. Watts and Virginia Harrison, MarketWatch
FRANKFURT (MarketWatch) — The dollar posted strong gains against a broadly tumbling euro Tuesday as the decision by Greece’s prime minister to seek a referendum on the country’s latest bailout resurrected fears that the European debt crisis could spiral out of control.
The euro EURUSD -1.62% plunged to $1.3630, down from $1.3908 in late North American trading Monday. The shared currency USDJPY +0.10% changed hands at ¥106.65 versus the Japanese yen, down from ¥108.56.
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 for the euro, while the turmoil surrounding the vote has put renewed pressure on European bond markets. Read more: Greek referendum means renewed uncertainty.
The euro “is falling through supports like they are water. ... Support lies at $1.3630 — below here it’s a long way to $1.31,” said Kathleen Brooks, research director at Forex.com.
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.”
The dollar index DXY +1.38% , which measures the greenback against a basket of six rival currencies, rose to 78.250, up from 76.243 late Monday.
Also Tuesday, the British pound GBPUSD -0.93% fell 1.1% to change hands at $1.5896.
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 Market Pulse about third-quarter U.K. GDP.
But a purchasing managers index for the manufacturing sector showed an unexpected contraction in activity in October. Read Market Pulse about the October 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 +0.10% changed hands 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 the high currency bears on the export-dominant economy. Read analysis on the yen intervention
Elsewhere in Asia, the Reserve Bank of Australia cut the official cash rates by 25 basis points to 4.5%.
The Australian dollar AUDUSD -2.21% fell 2.5% versus its U.S. counterpart, as investors shied away from risk-associated assets to trade at $1.0278 in recent action.
