The euro fell in volatile trade on Wednesday, hovering near a one-month low versus the dollar after traders said the European Central Bank bought Italian bonds but failed to bring market interest rates back to levels the country can afford.
The shared currency pulled away from a session high of $1.3557, also pressured after Italian bank Unicredit said it would ask the ECB to extend its access to funding, cranking up concerns about the health of euro zone banks.
The euro zone debt crisis has intensified sharply as investors question Italy's ability to sustain its debt burden, widely viewed as too big for other governments in the bloc to bail out as they have for the much smaller Greek, Irish and Portuguese economies.
The euro edged closer to $1.3429 hit in Asian trade, its lowest since October, as the impact of ECB purchases of Italian and Spanish bonds early in the European session faded.
ECB purchases initially pushed Italian yields down to around 6.83 percent, but their crawl back above 7 percent, a level the country could not afford to pay on new borrowing, raised concerns that the central bank will not be prepared to buy enough to deter aggressive selling.
The ECB buying bonds in the market was definitely the catalyst of the higher euro, said Adam Myers, currency strategist at Credit Agricole CIB. But people are starting to question how much more the ECB can buy.
The euro traded 0.4 percent lower on the day at $1.3469, below $1.3484, a previous low hit last week which traders had seen as a support level.
Maybe euro banks are in trouble, and that hasn't helped the euro, said a trader in London. The banks are big holders of euro zone government debt.
Traders said the euro's latest downmove was driven by selling by macro funds. The single currency slipped 0.6 percent to 103.62 yen, having fallen as low as 103.41 yen, its lowest since October 10.
The concerns about the euro zone also prompted selling in the Australian and New Zealand dollars, which are considered to be higher-risk currencies, to the benefit of the safe-haven dollar.
Against a currency basket, the U.S. currency hit a one-month high of 78.397, while it slipped 0.2 percent to 79.92 yen against a broadly stronger Japanese currency.
Some analysts were cautiously optimistic that Italy's new government would rein in its debts, and said further intraday losses in the euro could be limited if investors show confidence in Prime Minister designate Mario Monti's new cabinet.
Monti has begun unveiling his new government. Having won the backing of all but one of the country's political forces, he must push through a tough austerity program demanded by European leaders to restore shattered confidence in Italy.
But a climb in yields in France, Belgium and Austria has raised concerns those countries could come under increasing attack as incoming governments in Italy and Greece struggle to implement fiscal reforms.
A new government is coming in Italy but there's still no improvement on bond markets so it's hard to see what can be done in the short term to reverse this, said Lutz Karpowitz, currency strategist at Commerzbank in Frankfurt.
Some in the market see further downside for the euro as funding strains among European banks are evident with euro/dollar three-month cross currency basis swap spreads widening to a level not seen since late 2008.