The dollar rose to a new 4-year high against the euro on Tuesday as reports about Germany banning some short selling give traders more reasons to flock to the relative security of the U.S. currency and government debt.
The euro had been under pressure before the short selling news, as concerns about Europe's economy, and the ability of some countries to enact stuff budget cuts, weighed on sentiment for the shared currency.
The euro (CUR_EURUSD) fell to $1.2204, down from $1.2384 in North American trading late Monday. It fell as low as $1.2159 intraday, its lowest level since 2006.
The dollar index (DXY), which tracks the U.S. unit against a trade-weighted basket of six major currencies, rose to 87.160, up from 86.240 late Monday.
Against the Japanese yen, the euro (CUR_EURYEN) sank to ��112.71, down from ��114.61 Monday. It dropped as low as ��112.07, the lowest since March 2002.
The dollar fell to (CUR_USDYEN) buy ��92.35, compared to ��92.52 late Monday.
Germany will ban naked short-selling of some company shares and European government bonds as early as Tuesday, according to published reports.
"From a pure currency standpoint, the euro will now stand-out even more as the most liquid euro instrument to short to express a negative euro-area view with less risk of political interference," said Alan Ruskin, head of currency strategy at RBS Global Banking & Markets. "I suspect this will not be the end to the unintended consequences."
The euro could fall to $1.18 near term, according to Brown Brothers Harriman.
"The momentum was to the downside even before the short-selling news, but critics could say that the Europeans continue to fret about the symptoms rather than the actual illness and so could have accelerated this latest move in the euro," said Win Thin, senior currency strategist at the firm.
The four-week decline in the euro-dollar is the sharpest since the single currency was launched in 1999, said strategists at Morgan Stanley.
"We see downside risks to the euro stemming from weaker growth and spillover from the sovereign risk concerns," Morgan Stanley strategists Sophia Drossos and Stephen Hull wrote in a note. "However, since many of the policies enacted so far have not addressed longer-term structural threats facing the euro-zone, we would look for opportunities to re-set shorts."
Causing volatility earlier, George Osborne, newly named as the U.K.'s chancellor of the exchequer, expressed concerns about new rules to regulate hedge funds and a potential process for European Union members to review the budgets of other members, according to Dow Jones Newswires.
"This is the quick reason why the euro and stocks just dropped," said Andrew Brenner, head of emerging markets at Guggenheim Securities.
Risk on earlier
The shared currency had been modestly higher earlier amid signs of more comfort among investors to hold assets considered riskier and less demand for the relative safe-haven status of the greenback and the yen.
Greece's Finance Ministry confirmed Tuesday it had received 14.5 billion euros ($18.4 billion) in bilateral loans from fellow euro-zone countries via the European Commission. The funds come on top of the 5.5 billion already received from the International Monetary Fund and will ensure that Greece meets a 19 billion refunding commitment on Wednesday.
The news offered little surprise and had little impact on the market, strategists said.
In one sign that investor sentiment has stabilized, the yield premium demanded by investors to hold southern European government bonds over their German counterparts continues to narrow following European Central Bank purchases.
The spread between 10-year Greek and German bonds narrowed to less than five full percentage points, after blowing out to 10 percentage points earlier this month as the crisis deepened.
The euro showed little reaction to a much steeper-than-expected drop in the ZEW gauge of German investor confidence.
The dollar had little initial reaction to a pair of U.S. economic reports that showed housing starts rose more than expected in April while producer prices fell.
The housing-start gains serve to reinforce expectations that the U.S. economy will manage a decent recovery, said Greg Salvaggio, vice president for capital markets at Tempus Consulting Inc.
"We are seeing the euro resume its downward trajectory," he said.
Meanwhile, the British pound (CUR_GBPUSD) extended earlier losses to buy $1.4336, down from $1.4472 late Monday. Sterling was undercut earlier by a faster-than-expected acceleration of the annual inflation rate to 3.7% in April.
The rise required Bank of England Governor Mervyn King to pen an open letter to Chancellor of the Exchequer Osborne explaining why the central bank had missed the 2% target by more than a full percentage point.
Copyright 2009 Dow Jones Newswires
Streamlined First Tennessee narrows lossCURRENCIES: Euro Trims Loss After Hitting 4-year Low
