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The euro recovered in early Europe after it was beaten down in Asia on Tuesday, plunging to a record low versus the Swiss franc and sinking to a four-month trough against the dollar on growing concerns that the euro zone's sovereign debt crisis was spreading.
Market participants were especially concerned about the debt of countries such as Spain and Italy, which came under strong selling pressure the day before.
"The market has become particularly concerned due to the sell-off in Italian bonds. A steep widening of the spread between Italian and German bonds is making the market worried," said Osamu Takashima, chief forex strategist at Citibank. "The market was to a certain extent expecting the problems in Greece to spread to Spain, but this drastic move in Italian bonds was very surprising."
The spread on the 10-year Italian bond yield over that of German bonds widened to above 300 basis points the previous day from about 180 bps at the start of the month.
Some traders said the euro came under pressure in Asia as IMF Managing Director Christine Lagarde failed to comment specifically on resolving Greece's problems.
Lagarde said the IMF and its European partners are not yet ready to discuss terms of a second Greek bailout, urging Athens to do more to deal with its debt crisis. Lagarde said Greece had taken important steps to cut its budget deficit but that they were not enough.
"I feel that the euro zone debt situation particularly deteriorated after Portugal was downgraded to junk status last week. The market again started to focus on the debt problem as being a problem for the whole region," said Kimihiko Tomita at State Street and Trust. "The fact that the euro broke decisively below $1.4 is significant. The most recent selling appears to be a bit too rapid, but the market could test the euro further in the short term given current sentiment," Tomita said.
European Union finance ministers meet later on Tuesday and are under the cosh to soothe market nerves ahead of Thursday's Italian bond auctions. Italy is aiming to raise 7.75 billion euros in the debt market, according to estimates from Barclays Capital.
The Bank of Japan kept monetary policy on hold.
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