DJ: Cyprus Jitters Push Euro To 16-Week Low Against Dollar

The euro dropped to a 16-week low against the dollar Tuesday, weighed by uncertainty over the details of an international bailout for Cyprus.

Cyprus's parliament on Tuesday rejected a proposal to tax the country's bank deposits, part of an international 10-billion-euro rescue package for the island nation. The plan failed to pass after lawmakers from the country's ruling Democratic Rally party abstained from voting.

The bill's rejection means Cyprus will likely renegotiate a deal with its European creditors or ask for financial assistance from longtime ally Russia.

Uncertainty over the details of the proposal prompted investors to sell the euro against major currencies, resulting in choppy currency moves throughout the day.

"The market is so nervous right now that anything remotely negative coming out of Cyprus will lead traders to gun down the euro," said Richard Smith, a trader at Faros Trading in Stamford, Conn.

The euro ended the New York session at $1.2883, down from $1.2956 late Monday. It traded as low as $1.2844, its weakest level against the dollar since Nov. 22, 2012. Against the yen, the euro fell to Y122.60 from Y123.37.

After the failed vote, the European Central Bank announced that it will provide liquidity as needed within existing rules, adding that it's in contact with its so-called "troika" partners: the International Monetary Fund and the European Commission.

Currency traders are keeping a wary eye on the re-opening of Cypriot banks, which is currently scheduled for Thursday after they had been closed for five days. Central bank governor Panicos Demetriades said banks could lose as much as 10% of their deposits within days of reopening.

"Even if Cyprus gets rescued somehow, it's not clear what will happen to the banks' capital once they're re-opened," said Brian Kim, currency strategist at RBS Securities in Stamford, Conn. Mr. Kim said the euro could have further to fall, especially if the concept of taxing savers spooks depositors in Italy and Spain into withdrawing their money.

Meanwhile, the pound traded relatively flat against the dollar ahead of Chancellor of the Exchequer George Osborne's unveiling of the annual U.K. budget on Wednesday. Barclays analysts say the pound could sell off if Mr. Osborne gives the Bank of England more flexibility with inflation targeting, which would lower the barrier for further BOE easing.

Also Wednesday, the Bank of England will publish the minutes from its March 6-7 meeting, which market participants will be scrutinizing for any signs that the central bank is moving closer to more easing.

The dollar fell against the yen to Y95.16 from Y95.22 late Monday. The Australian dollar also dropped to $1.0369 from $1.0402.

The Wall Street Journal Dollar Index, which measures the dollar against a basket of currencies, rose to 73.695 from 73.480.