The euro fell to its lowest against the dollar in more than a month today after comments by a European Central Bank official bolstered the view that euro zone monetary policy would remain loose for months to come.
ECB Governing Council member Axel Weber told Bloomberg news agency that it would be "wise" to extend unlimited liquidity to banks past the end of 2010 and resume discussions to exit loose monetary conditions next year.
The comments came after St Louis Federal Reserve president James Bullard yesterday said the US central bank may need to ramp up purchases of US Treasuries if price levels in the U.S. economy continue to shows signs of softening.
Analysts said that dovish comments from central banks were adding to an increasingly sombre economic outlook, which would keep risk aversion high.
"The comments will lead the market to believe that policymakers are expecting further economic weakness," said Raghav Subbarao, currency analyst at Barclays Capital.
"Although a move towards active easing requires more bad data, slowing growth will postpone any policy tightening."
He added that this view would continue to make investors reluctant to take on significant positions in risky assets, and may push the euro lower. The safe-haven dollar often appreciates during times of risk aversion.
Weakness in the US economy was highlighted by data yesterday showing a rise in new US jobless claims while a mid-Atlantic manufacturing index fell this month for the first time in more than a year.
By 1028 GMT, the euro had fallen 1 per cent on the day to $1.2686 according to Reuters data, its lowest since mid-July.
Some market participants cited euro selling by central banks as pushing the single currency lower, while stop-loss orders were triggered just below $1.2730.
Technical analysts said the market was focusing on the $1.2646 region, around the 23.6 per cent Fibonacci retracement of the euro's slide in November 2009-June 2010.
Losses in the euro helped pushed the dollar up 0.7 per cent against a currency basket to a one-month high of 83.161
The dollar rose 0.4 per cent versus the Swiss franc to 1.0355 francs, but it hovered near a seven-month low of 1.0254 hit yesterday. The safe-haven franc has gained broadly in the past week or so, indicating investors remain risk averse.
The dollar's broad gains failed to boost it against the yen. It was unchanged at 85.40 yen, hovering in range of 84.72 yen hit last week for the first time since 1995.
Reuters