SYDNEY (Reuters) - The euro languished at two month lows early in Asia on Wednesday, threatening to deepen its losses, while the euro zone debt crisis and heightened tensions in the Korean Pennisular helped underpin the dollar.
Already hammered by Europe’s inability to contain Ireland’s debt woes, the single currency shed 1.9 percent overnight to as low as $1.3359, putting key support in the $1.3333 area, the August high, in clear sight.
A break of that level could pave the way for a retest of $1.3232, the 61.8 percent retracement of the August to November rally, before $1.3000. It last traded at $1.3378, versus $1.3373 late in New York.
In the words of German Chancellor Angela Merkel, the euro was in an “exceptionally serious” situation.
Investors took aim at Spanish government bonds on Tuesday, driving the premium over German benchmarks to a euro lifetime high after Madrid was forced to pay a high cost to sell short-term bills.
“Contagion from the Irish situation during the last few months was largely limited to Greece and Portugal. Not any more,” wrote Matthew Strauss, strategist at RBC Capital Markets, in a note.
The European Union urged Ireland to adopt an austerity budget on time to unlock promised EU/IMF funding, in response to a deepening political crisis that could derail the financial rescue to recapitalise the country’s banks and fund its public finances.
Further dampening risk appetite was heightened tension in north Asia after North Korea fired scores of artillery shells at a South Korean island on Tuesday, prompting Seoul to warn of “enormous retaliation” if it took more aggressive steps.
The dollar surged to 1,170.90 won, from around 1,125 won on Tuesday as investors dumped the South Korean currency.
“It just means the whole region is less attractive than it was before this,” said Sean Callow, strategist at Westpac Bank in Sydney. “Into year-end, only the brave will be nibbling at risk. That is negative for Asian currencies and negative for the Aussie as well.”
As investors took fright and sold riskier assets such as stocks, the yen and dollar benefited from the flight to safety. The Japanese currency was the best performer among the majors, chalking up gains against the dollar, euro and sterling.
The dollar briefly fell below 83.00 yen before recovering slightly to 83.13. The euro slumped to 110.69 from a session high of 113.68, reaching lows not seen since September 16. It was last at 111.19 yen.
The dollar index rallied toward 79.800 .DXY, its best level since late September, having pierced Fibonacci resistance at 79.596, a level representing the 50 percent retracement of the August to November fall.
The next hurdle is at 80.533, the 61.8 percent retracement.
Commodity currencies also languished against the backdrop of heightened risk aversion. The Australian dollar slid to a four-week low of $0.9708 and was last at $0.9730, while the New Zealand currency plumbed $0.7584, lows not seen since October 29.
Investors are now looking to see how Asian shares fare and further losses will tend to keep the yen and dollar supported.
Additional reporting by Steven C. Johnson in New York