The euro plumbed two-month lows in Asia today while the Australian dollar sank closer to parity as rising disappointment over the European Union's summit prompted investors to position for possible downgrades of euro zone sovereign credit ratings.
Rating agencies warned yesterday that last week's EU summit, viewed by some as a last chance to save the euro, did not go far enough in easing immediate concerns about the region's debt markets.
The euro fell as low as $1.3160, but climbed as far as $1.3206, in the Asian afternoon on shortcovering before steadying at $1.3192.
Net euro short positions totaled 95,814 contracts in the week through December 6th, according to Commodity Futures Trading Commission data, and market participants said shorts likely increased in the wake of the disappointing summit.
A break below October 4th's nadir of $1.3145 would take the euro back to depths not seen since mid-January.
Pressure on the euro and heightened risk aversion increased the dollar's safe-haven appeal and helped lift the dollar index to 79.651, its highest this month, before it eased back to 79.476.
The dollar index was above its weekly Ichimoku cloud top for the first time since September 2010.
The dollar also edged up against the yen, rising as high as 77.97 at one stage before trading around 77.86.
The fall in risk appetite hurt commodity currencies, which suffered steep declines.
The Australian dollar shed more than 1 cent to a two-week low of $1.0030, before recovering as high as $1.0096, breaking through resistance at the base of its daily Ichimoku cloud at $1.0077 and approaching its 55-day moving average at $1.0120. The Aussie was last trading around $1.0083.
Support now lies at its 21-day moving average of $1.0047 and then at parity, followed by $0.9942, which would represent a 61.8 percent retracement of its November-December climb.
Later today, the Federal Reserve will hold its final policy meeting of the year but it is not expected to take any action other than some finishing touches on its communication strategy. Many analysts expect the Fed to wait until a two-day meeting on January 24th before launching any new initiatives.
Ahead of the Fed, investors are waiting for a closely watched survey of German analyst and investor sentiment, as well as US retail sales data.
Market liquidity has been thin ahead of year-end holidays, which could hurt demand in bond sales by Italy and Spain on tomorrow and Thursday. Weak results would add to pressure on the euro.
The ECB was seen buying short-dated Italian bonds yesterday but this failed to convince markets that the central bank is about to significantly step up its purchases beyond a reported weekly commitment of up to €20 billion.
