The euro has fallen back versus the dollar and other majors, giving up some of its recent gains, as euro zone sovereign associated risks have come to the fore once again. Weighing on euro sentiment were contrasting statements by euro zone leaders, highlighting that last week’s deal to rescue Greece has far from solved all the problems. The Greek Prime Minister referred to the country’s new deal as “in essence tantamount to introducing a European bond”, which could well cause concern amongst critics of euro zone bailouts in Germany and other northern European countries. Traders also sold the euro exchange rate in response to yesterday’s rise in Italian government bond yields ahead of an auction today, with the increase intensifying fears of contagion risks.

While trading close to lifetime lows versus the CHF, the euro’s downside versus the dollar should be protected by the fact that the US has yet to make any progress on its own debt talks as the administration fails to come up with a comprise plan that suits all sides. Talks are set to continue today as the August 2nd deadline approaches fast. Adding to the gloom on the US was the news of a disappointing durable goods report overnight, which suggested continued sluggishness in manufacturing. Orders for goods designed to last at least three years fell 2.1% in June compared to expectations for a 0.4% increase.

Meanwhile, according to the Fed’s latest Beige Book, the pace of economic recovery moderated in much of the US in June and early July. The Reserve Bank of New Zealand announced overnight that it was leaving rates on hold at 2.50%, in line with expectations. However, its statement suggests tightening down the road, which should provide support to the NZD and AUD. Sterling is off highs versus the dollar this morning but up modestly versus the euro.