NEW YORK (Reuters) - The euro slid against the dollar on Monday after two days of gains, rattled by poor euro zone data and concerns that the region’s debt crisis could spread to other healthier European nations after Dutch officials failed to agree on budget cuts.
Analysts said sentiment toward the common currency was bearish, with most investors looking to sell it on any rally before debt auctions this week in Italy and the Netherlands.
After the breakdown in budget negotiations, Dutch Prime Minister Mark Rutte said he tendered his cabinet’s resignation to the Dutch queen, adding that she will consider it and had asked for the government in the meantime to keep doing whatever was in the country’s interest.
The budget impasse in the Netherlands could threaten its triple-A rating and weighed on the euro.
A report showing German manufacturing unexpectedly shrank at its fastest pace in nearly three years in April further pressured the euro. A contraction in manufacturing and services also deepened in the euro zone as a whole.
“By far, the bigger story for FX markets in 2012 should be the scale of Eurozone growth underperformance. Today’s large fall in the German manufacturing PMI is just a taste of things to come,” said Richard Franulovich, senior currency strategist, at Westpac in New York.
Italian bond yields surged, as did French borrowing costs after Socialist Francois Hollande - who has promised to renegotiate a European budget pact - won the first round of France’s presidential poll.
In early afternoon trading, the euro fell 0.6 percent to $1.3140, holding below Friday’s two-week high of $1.3226, according to Reuters, logged after a near-1 percent rally in the week, its best since late February. Its decline to session lows after the Dutch resignation news pushed it below support at its 100-day simple moving average, currently $1.3118.
Many market participants expect the euro to trade in a range between $1.3000 and $1.3300, with worries about feeble euro zone growth likely to dominate sentiment. But analysts said the euro could fall sharply once it makes a sustained break below strong chart support at $1.30.
On the charts, the euro has been carving out a head-and-shoulders top over the past two months, with gains repeatedly unfolding in three-wave, counter-trend moves, and declines have been impulsive, said MacNeill Curry, technical strategist at Bank of America Merrill Lynch in New York.
For instance, he said Friday’s highs in euro/dollar at $1.3228 look to have completed a wave two, “indicating weakness should accelerate sharply in the sessions ahead.” Curry added that key euro support was at $1.3042/45, ahead of $1.30.
Against the yen, the euro fell more than 1 percent to 106.65 yen, gaining no support from a weekend deal to double the International Monetary Fund’s firepower to contain the debt crisis. Analysts said while the IMF managed to raise more than $400 billion, the new funds were well below the target of $600 billion and came with requests for further oversight.
The news from the Netherlands was not unexpected but sparked concerns that political uncertainty could put into question euro zone states’ commitment to austerity measures, coming on top of growing worries about the shaky state of Spain’s public finances.
The yield spread on triple-A rated Dutch bonds over German paper moved out to its widest in three years, while the Italian debt yield spread also increased. Both the Netherlands and Italy hold bond auctions on Tuesday.
Investors were concerned too that a victory in the French presidential election next month for the Socialist Hollande may loosen his country’s commitment to austerity. President Nicolas Sarkozy is the first sitting president to find himself behind after the first round.
The French run-off vote coincides with a parliamentary election in Greece, where support for the two main pro-bailout parties is at historic lows. There is also an Irish referendum on a euro zone fiscal compact agreement on May 31.
The dollar, meanwhile, gained against most major currencies ahead of a two day Federal Reserve policy meeting that concludes on Wednesday. Investors are watching to see whether Fed policymakers bring forward their projection on when the U.S. central bank should start raising interest rates.
“The U.S. central bank has already vowed to (keep) its key fed funds rate super-low over the coming years to strengthen a pedestrian recovery, putting the main emphasis for traders on its accompanying statement and its fresh forecasts on growth and inflation,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
The dollar index was last up 0.3 percent at 79.409 .DXY.
The dollar shed 0.5 percent against the safe-haven yen to trade at 81.15 yen. But yen gains were seen as limited before a Bank of Japan policy meeting on Friday, which is expected to adopt fresh easing steps.