The euro weakened broadly, as fears over Greece's protracted debt negotiations and sober U.S. economic data tempered early optimism over European leaders striking a new deal to impose fiscal discipline across the Continent.
Despite optimism that a deal between the Hellenic republic and its private bondholders could have been struck last weekend, discussions between the two sides have dragged past several deadlines. The lack of resolution has sent Portugal's bond yields surging to record highs and pulled the euro off a six-week high it hit on Friday.
The single currency's losses accelerated after a clutch of U.S. housing, manufacturing and confidence data revealed weakness in the economy, sparking safe-haven demand for the dollar and curbing appetite for stocks and high-yielding currencies. In the wake of the data, and with no news on Greece, the euro plumbed a new 4½-month low against the Swiss franc.
"Greek uncertainty has the ability to rear its ugly head and make the market come undone," said Greg Michalowski, chief currency analyst at FXDD in New York. "Portugal's yields moving higher bring another level of risk to the euro," he added, saying the single currency was likely to retest its 16-month low at $1.2626.
Although liquidity measures by the European Central Bank have lowered the borrowing costs of Italy and Spain, Portugal is widely viewed as the next domino to fall in Europe's debt saga—even though the country's multibillion euro bailout means the country doesn't have to tap capital markets for at least another year.
In late-afternoon trade, the euro was at $1.3079, after topping $1.32 and compared with $1.3143 late Monday. The common currency was at ¥99.695 compared to ¥100.60 and the dollar was at ¥76.22 from ¥76.34. The U.K. pound traded at $1.5754 compared to $1.5710, while the dollar bought 0.9206 Swiss franc from 0.9170 franc.
The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 79.32, up 0.2%.
In spite of last October's agreement that private bondholders would take a 50% write-down on their bonds, Greek Finance Minister Evangelos Venizelos was quoted by Reuters as saying the final figure would likely be more than 70%. The news increased worries that the process could devolve into a destabilizing default that could send shock waves through euro-zone debt markets.
On Monday, European Union leaders struck an agreement to impose tighter fiscal discipline across the Continent and take other measures to help calm the debt crisis that has raged for more than two years. The news initially sent the euro higher, but fears about Greece caused its gains to evaporate.
Market participants are focused squarely on negative news at the moment, and that has been hurting the euro, said Vassili Serebriakov of Wells Fargo. "The negatives took over," including fresh concerns about Portuguese bond yields surging and a trio of disappointing U.S. economic reports, he added.
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