The euro hit a seven-week low Tuesday as the euro zone debt crisis deepened overnight, hovering right above levels that if breached could lead to a sharper selloff in the single currency.
While the euro has taken a beating against other currencies, it has held up remarkably well versus the dollar on buying from central banks, but a break of chart levels could finally yank the legs from under it, traders said.
A more decisive fall below its August low of $1.4055 could pull the euro under its 200-day moving average at $1.4015 for the first time since January, opening the way for a further slide toward the July spike low of $1.3838.
The euro last traded down 0.3 percent at $1.4057, having dipped as low as $1.4038. Below this level, traders said, orders mixed with both stop-loss selling and bids related to an option barrier lurking at $1.4000.
The euro also fell to a six-month low versus the Japanese yen at 107.95 yen.
Market players were unanimous in thinking that the euro was poised to extend its longest losing streak since April, hurt by soft equities and after Italian bonds were sold on worries Rome is not doing enough to bring its debt under control.
I don't think the euro can eke out even modest gains today. The euro zone crisis has been deepening and it's very hard to find any potential for a positive surprise in the near term, Koji Fukaya, director of global foreign exchange research at Credit Suisse Securities in Tokyo, told Reuters.
Underscoring investor angst over a watered-down Italian austerity package, the cost of insuring Italian debt against default rose above that of Spain for the first time since December 2009, while European stocks tumbled 4 percent on Monday.
The heaviest pressure on the euro emerged from the safe-haven Swiss franc which inched back up toward a record high versus the dollar adding 0.2 percent to 0.7853. The euro fell 0.6 percent to 1.1023 francs, off a recent peak of 1.1970 francs marked last Monday.
The pair found some respite around its immediate support at the kijun line on their daily chart at 1.1027 francs, but traders expect more falls in the pair unless the Swiss National Bank starts intervening in currency markets again.
MORE RISK AHEAD
Traders said the key risk for the common currency this week is if the European Central Bank takes on a dovish stance at Thursday's policy meeting.
Without the support of a more hawkish central bank, the euro will look very vulnerable, Societe Generale strategists Kit Juckes and Sebastien Galy wrote in a note, adding a fall below $1.3900 could easily take the common currency back to $1.3000.
The euro zone itself also faces a testing time, not least Greece's ongoing dispute with the EU and IMF on fiscal slippages which threatens to delay the next tranche of aid, worries about European bank funding and legal challenges to bailouts.
On top of that, on Tuesday the Finance Ministers of Germany, the Netherlands and Finland will meet to discuss the issue of collateral for loans to Greece.
The euro's weakness saw the dollar index climb to a one month high at 75.305. Dollar/yen, though, continued in a tight range on either side of 76.80 yen, contained by the threat of yen-weakening intervention from Japan.
Last Friday, the closely watched U.S. non-farm payrolls report showed jobs growth grounded to a halt last month, adding to fears about a U.S. recession and raising hopes the Federal Reserve will add more stimulus.
Markets though appeared to be starting to come around to the idea the Fed will do this by increasing the maturity of the assets in its balance sheets, known as 'operation twist', rather than launch a fresh round of bond buying, or QE3.
Right now this is not hurting the greenback too much, but some analysts suspect the Fed will have to go all in at some point.
If and when QE3 does eventually happen (as our economists expect), we would expect a further rally in equities and the U.S. dollar resuming its downtrend, said the analysts at SG.
Commodity currencies struggled after coming under heavy pressure as most Asian bourses fell and S&P futures extended losses to 2.5 percent.
The Australian dollar dipped 0.4 percent to $1.0508, having hit a session low of $1.4038 earlier in the session. It was down some 2- cents from last week's peak.
Australia's central bank held interest rates steady at 4.75 percent for a tenth month on Tuesday as turmoil in global markets has clouded the outlook for the world economy.
(Reporting by Antoni Slodkowski, Ian Chua and Hideyuki Sano; Editing by Joseph Radford)