The U.S. dollar traded sharply lower against its major counterparts Wednesday, after a senior European Central Bank policymaker stated there were some arguments in favor of giving Europe's new permanent bailout fund a banking license.
During U.S. afternoon trade, the dollar was lower against the euro, with EUR/USD climbing 0.80 % to hit 1.2159.
The euro strengthened after ECB Governing Council member Ewald Nowotny said that there were some grounds for giving the European Stability Mechanism a banking license, which would increase its firepower to fight the debt crisis in the euro zone.
Markets have been hit by fears that the ESM would not be sufficiently large enough to cope in the event that Spain will require a full-scale sovereign bailout, in addition to the rescue package already agreed for its bank’s.
Earlier in the day, the yield on Spanish 10-year bonds rose to a euro-era record high of 7.71%, before easing back to 7.40%, still above the 7% threshold widely considered unsustainable in the long run.
Meanwhile, weak economic data out of German indicated that the euro zone’s largest economy is being affected by the debt crisis in the bloc.
The German research institute Ifo said its Business Climate Index fell to 103.3 in July, the lowest level since June 2010, from a reading of 105.2 in June.
The dollar came under pressure after the Wall Street Journal reported that a number of Fed officials are moving closer to implementing fresh measures to shore-up growth and bolster employment, following recent disappointing economic data.
The greenback eased lower against the pound, with GBP/USD up 0.04% to 1.5512.
Sentiment on sterling was hit after official data showed that U.K. gross domestic product contracted by 0.7% in the second quarter, far more than the 0.2% contraction economists had forecast, extending Britain's recession into a third quarter as an extra public holiday for the Diamond Jubilee and poor weather weighed on economic activity.
Elsewhere, the greenback traded lower against the yen, with USD/JPY easing down 0.05% to 78.13, and against the Swiss franc, with USD/CHF declining 0.80% to trade at 0.9877.
Earlier Wednesday, the Bank of Japan said it would not hesitate to ease monetary policy further if the yen's appreciation severely threatens Japan's economic recovery.
The greenback was lower against its Canadian, Australian and New Zealand counterparts, with USD/CAD falling 0.73% to 1.0147, AUD/USD climbing 1.04% to 1.0329 and NZD/USD rising 0.20% to trade at 0.7861.
The Australian dollar was little changed earlier, following official data showing that domestic consumer price inflation rose 0.5% in the second quarter, slightly below expectations for a 0.6% increase, after a 0.1% rise the previous quarter.
The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was down 0.51% to trade at 83.64.
Further depressing the greenback Wednesday, official data indicated U.S. new home sales fell more-than-expected in June, dropping 8.4% to a seasonally adjusted 350,000 unit annual rate, compared to expectations for a decline of 2.6% to 372,000.
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