SINGAPORE: The euro slipped on Wednesday after a newspaper reported Belgium and France were in fresh talks over an existing rescue deal for Dexia, stirring worries about the potential for an increased fiscal burden on France.
Belgian newspaper De Standaard said that talks were taking place, citing no sources, although it also said that Belgium's finance minister Didier Reynders denied that the accord reached between the two states to rescue the bank would be dismantled.
The newspaper said the talks concerned the distribution of the costs between the two countries after the rescue of Dexia, the first government bailout of a European bank in the euro zone debt crisis.
Market players said the report stirred worries that France may end up playing a larger role in the bailout plan, which if true could have implications for France's AAA credit rating.
"It's all about France taking a larger stake in Dexia -- if they do they run the risk of a sovereign downgrade," said a US-based currency trader.
The euro fell 0.3 per cent to $1.3472, nearing support at last week's low of $1.3421 on trading platform EBS.
"Broadly speaking, certainly anything that threatens France's credit status is likely to be taken as negative for the euro," said Todd Elmer, currency strategist at Citi in Singapore.
The euro's drop helped lift the dollar index to a six-week high of 78.549 at one point.
The euro has been trading on either side of $1.3500 for days now, underpinned by talks of repatriation flows from European banks and a reluctance by speculators to put on more negative positions in an already short market.
But persistent worries over the euro zone's debt crisis and signs of dollar funding strains have kept market sentiment brittle.
Risk appetite took a further hit after the HSBC flash manufacturing purchasing managers' index (PMI) showed China's factory sector shrank the most in 32 months in November as new orders slumped.
The Australian dollar extended its losses on the data and touched a six-week low of $0.9755 at one point. After trimming some losses, the Aussie dollar was last down 0.5 per cent at $0.9780.
The Australian dollar is sensitive to shifts in China's economic fundamentals since China is a major buyer of Australia's commodity exports.
Having been frustrated by the euro's resilience, the market recently took aim at commodity currencies as debt problems in the euro zone claimed new victims and European banks struggled to access funding markets.
With Tokyo players away for a national holiday in Japan, moves in the dollar versus the yen were subdued, with the dollar holding steady at 76.98 yen.
