The euro dropped to its lowest against the dollar for two months and a record low against the Swiss franc on Monday amid continued worries over the eurozone sovereign debt crisis.
The single currency suffered after Standard & Poor’s rating agency downgraded its outlook on Italian government debt and speculation grew over Greek debt restructuring.
Eurozone manufacturing and services sector purchasing managers’ surveys were weaker than expected for May, adding to pressure on the euro.
Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ said that the most worrying development for the single currency was probably the surge in Italian government bond yields in response to S&P’s move.
“Italy has the largest government bond market in the eurozone, and continued rising yields there over the coming weeks would have a very destabilising impact on the eurozone debt markets.
“With the authorities still seemingly divided over how to proceed with the debt crisis, there remain considerable short-term risks for the euro,” he said.
The shift in sentiment against the single currency was highlighted by positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, which were released over the weekend. Speculators cut the value of their bets on further gains for the euro by $3.5bn to $7.4bn in the week to May 17, according to the data.
This meant long euro positions have been cut by more than 50 per cent since they hit their highest level since July 2007 only two weeks previously.
By late in the day in New York, the euro had fallen 0.8 per cent to $1.4051 against the dollar, its weakest level since March 18. The single currency hit a record low of SFr1.2323 against the Swiss franc, though it recovered later to SFr1.24. It dropped to an eight-week trough of £0.8698 against the pound before rebounding slightly to above £0.87.
Get alerts on Currencies when a new story is published