The dollar gained for the second straight day against the euro on Tuesday as new concerns about the funding needs of European banks offset stronger-than-expected German economic data.
The yuan declined against the dollar after China's weekend pledge to allow its currency to trade more freely. The upward momentum seen Monday that helped stoke demand for higher-yielding currencies such as the Australian dollar faded as investors acknowledged that a more flexible yuan policy would not lead to a sharp appreciation in the currency.
Euro zone bank woes again came to the fore after French bank Credit Agricole (CAGR.PA) pushed back profit targets for its struggling Greek unit Emporiki (CBGr.AT) on Tuesday and said it will take a 400 million euro ($536.7 million) writedown as Greece fights its debt load.
Analysts said a ratings downgrade of French bank BNP Paribas by Fitch and S&P's announcement on Monday that it was raising its estimates for loan losses for Spain's banking sector continued to weigh on the euro.
The single currency extended losses after Moody's Investor Services cut two Greek government-sponsored asset-backed securities.
The Credit Agricole, BNP and Moody's news has all brought back into the limelight the likelihood of structural problems in the euro zone, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange Inc in Washington, D.C. The impact from yesterday's China's news has definitely faded.
In early New York trade, the euro was down 0.2 percent at $1.2274, with the session low at $1.2251.
The single currency touched $1.2490 on electronic trading platform EBS on Monday, its strongest point since May 24, though it failed to break into the $1.25 region.
Market participants said the euro would face more losses, but technical analysts said near-term support was seen at $1.2253, a 38.2 percent Fibonacci retracement of the rise from a four-year low around $1.1875 on June 7 to Monday's high.
The euro barely reacted to the German Ifo business climate index, which hit a two-year peak in June, while the expectations index fell.
The positive surprise in the Ifo index failed to change the market's negative mood. The fact that the expectations component was downbeat did not help to support the single currency, analysts at Credit Agricole CIB said in a note.
The Swiss franc extended gains to a fresh all-time high against the euro after the Swiss central bank's vice chairman said the bank would not intervene in markets for now.
The euro fell to a low of 1.3610 francs, according to Reuters data, as an option barrier at 1.3650 franc gave away. Traders said stops were triggered below that level and there were more barriers at 1.3600.
The euro fell 0.7 percent versus the yen to 111.25 yen. The dollar fell 0.4 percent to 90.64 yen as the Japanese currency rose across the board.
CHINA IMPACT FADES
China's pledge to revalue its currency had less impact on markets on Tuesday.
A moderate appreciation of the yuan will not change China's current account situation and it won't imply the end of global imbalances, said Ulrich Leuchtmann, currency strategist at Commerzbank in Frankfurt.
Therefore there is no reason for a significant impact on the euro/dollar or dollar/yen, he said. It would have to be quite a large revaluation to have a lasting impact on the majors.
The yuan's daily mid-point was set at 6.7980 per dollar on Tuesday, the highest since its July 2005 revaluation, but the Chinese currency relinquished gains as big, state-owned banks heavily bought dollars.
Sterling fell to a session low against the dollar but then recovered, as UK Finance Minister George Osborne unveiled the new government's first budget.
(Reporting by Nick Olivari; additional reporting by Naomi Tajitsu and Tamawa Desai in London; editing by Jeffrey Benkoe)