UPDATE: Euro Breaks Key Support After Digital Option Expiry

NEW YORK (Dow Jones)--The euro fell below its 200-day moving average against the dollar Thursday, after the 10 a.m. EST expiry of a large option payout prompted heavy selling of the single currency.

As selling momentum intensified, the euro fell sharply to a U.S. session low at $1.3032 in morning trading in New York, according to EBS via CQG. The currency was well below its 200-day moving average below $1.3085 and at its lowest level since Dec. 1.

Market participants said that a so-called "digital option" was linked to the single currency holding below the $1.3125 level after 10 a.m. Once the euro failed at that level, the option holder received a large payment that prompted more euro selling.

"Prior to that expiry, the buyer has an interest to try and drive euro down, seller has interest to keep euro higher," explained Brian Dolan, chief currency strategist at Forex.com.

Meanwhile, the dollar has been underpinned by optimism about the U.S. economic recovery. Dealers are now eagerly awaiting Friday's nonfarm payrolls data for confirmation that long-stagnant labor markets might be stirring again.

"The immediate proximate cause of the euro's weakness [was the digital option], but overall trend is still for a weaker euro and stronger dollar," Dolan added.

The single currency was below its 200-day moving average for the first time since Dec. 29 when it briefly traded below the key technical threshold.

-By Stephen L. Bernard and Javier E. David, Dow Jones Newswires; 212-416-4528; stephen.bernard@dowjones.com)

--Bradley Davis and John Parry in New York contributed to this story.