By William L. Watts and Myra P. Saefong, MarketWatch
LONDON (MarketWatch) — The euro remained under heavy selling pressure Tuesday as the euro-zone debt crisis intensified, sending government bond yields soaring for Spain and other high-deficit countries on the periphery of the region.
The dollar index (DXY 81.20, +0.36, +0.45%) , a measure of the U.S. unit against a basket of major rivals, rose to 81.149 from 80.797 on Monday.
The euro (EURUSD 1.3009, -0.0112, -0.8535%) fell below the $1.30 level versus the U.S. dollar for the first time since mid-September to trade as low as $1.2979, according to FactSet Research.
The currency changed hands at $1.3032 in recent action, down from $1.3121 in late North American trade Monday.
The yield premium demanded by investors to hold Spanish 10-year government bonds over German bunds hit three full percentage points on Tuesday, the highest since the launch of the euro in 1999. Spanish, Italian and Portuguese bond yields jumped. Bond yields move in the opposite direction of price.
The ongoing turmoil comes after European Union officials on Sunday finalized a bailout package for Ireland and outlined a plan to replace the rescue fund put in place following last spring’s Greek bailout with a permanent mechanism that would potentially require private bond holders to take writedowns in the event of debt crises that take place after mid-2013.
The measures, however, failed to soothe markets.
“It is now becoming increasingly clear that the only options open for a final solution are to either adopt closer fiscal policies across all European countries, and with austerity fatigue already creeping in across European populations that looks unlikely, or for the single currency to somehow restructure itself in a manner that represents the differences between the respective stronger and weaker economies,” said Michael Hewson, an analyst at CMC Markets.
“Euro-zone peripheral worries are set to keep the euro under pressure, with [the euro-dollar pair] continuing to be sold on rallies,” said Mitul Kotecha, head of global foreign-exchange strategy at Credit Agricole, in emailed comments.
But “the outlook for the U.S. dollar is positive over the short term against the background of rising risk aversion and improving U.S. economic data,” he said.
Against the yen, the dollar (USDYEN 83.8100, -0.4600, -0.5459%) bought ¥83.77, down from ¥84.25 Monday. See more currency research tools.
“The downside for the yen appears limited in the short term, as rising risk aversion and a renewed narrowing in bond-yield differentials between the U.S. and Japan, suggest that there is little fuel for further [dollar-yen] upside,” Kotecha said.
The British pound (GBPUSD 1.5525, -0.0046, -0.2954%) traded at $1.5531, down 0.2%.
