The euro fell more than one per cent to its weakest level against the dollar in seven months yesterday after France's rejection of the European Union Constitution sparked worries about reform prospects in Europe.
Analysts say the eurozone needs deep reforms because of its anaemic growth and low confidence, but the French vote underscored voters' distrust of a reform drive that could limit social protection.
In response, French President Jacques Chirac named Dominique de Villepin as the new Prime Minister, following a government reshuffle in the wake of Sunday's referendum. Mr Villepin was seen as a Mr Chirac loyalist who is unlikely to reintroduce reforms.
"It's not clear what will happen to Europe," said Daragh Maher, senior currency strategist at Calyon in London. "A lot of questions have been raised by this vote and none of this is immediately positive."
"The vote is seen by some as a vote against reform and a vote for the traditional model... and Villepin is generally viewed as more of a social, traditional French model of management."
The euro's initially muted reaction to the French vote on a holiday-thinned Monday turned into a sharp fall yesterday when it crashed through chart support at $1.2385, the 23.6 per cent retracement of its 2000 to 2005 bull move, and $1.2345, its 100-week moving average.
Yesterday's plunge brought the euro to its lowest level in seven months at $1.2312 and reversed a run that had started in mid-October and ended with record highs against the dollar in December.
At 1200 GMT the euro traded more than one per cent weaker on the day at $1.2330. It also hit a four-month low at 133.15 yen.
The yen was down slightly against the dollar at 108.20. Japan's Finance Ministry said it did not intervene in the foreign exchange market in May, as expected.
Surveys of eurozone economic, business and consumer sentiment published by the EU Commission yesterday showed a deterioration in May, underlining the gloomy attitude in Europe which helped sink the charter in Sunday's French referendum.
They also underlined the need for economic reform and souncd policymaking in the bloc.
"It looks like the EU is on its way to becoming a very loose grouping and if the euro is a representation of the bloc then there is little reason to see a strong currency," said Peter Fontaine, currency strategist at KBC in Brussels.
Voters were likely to deal another blow to the European Constitution today in the Netherlands, where polls show the no camp is likely to gain 60 per cent of the votes.
Another decisive defeat of the charter was likely to further damage the euro, which was already getting little support on currency trading charts.
However, the European Commission moved to soothe concerns about the euro, saying it was relaxed about the way the currency reacted to the referendum vote.
A Commission spokesman said Economic and Monetary Affairs Commissioner Joaquin Almunia believed the impact on the currency markets would be temporary and limited.
The bad news for the euro contrasts with US economic data this week which are expected to reaffirm the Federal Reserve's steady lifting of interest rates.
"The dollar continues to shine in the aftermath of Sunday's French referendum result," UBS analysts said in a research note.
The Chicago PMI index of regional factory and business activity, due at 1400 GMT, is forecast at 62.0 in May compared with 65.6 in April, holding well above the 50 point dividing line to show solid growth.
The Institute for Supply Management's report on manufacturing is due today and the monthly payrolls report on Friday.