The euro was hammered against major currencies this morning as the financial crisis spread throughout Europe without signs of a co-ordinated policy response, while the yen gained broadly as investors unwound riskier assets.
Sentiment soured against the euro after leaders of Europe's four biggest economies decided against a coordinated bailout plan at a weekend summit.
"We are seeing an intensification of risk aversion overnight and the main beneficiaries are the yen and dollar," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi-UFJ.
At 8.59AM, the euro was down 1.2 per cent at $1.3607 after sliding to a fresh 13-month low of $1.3552 in early European trade.
The euro was down 3 per cent against the yen at 140.66 yen after hitting a 2-1/2-year low. The dollar was down 1.7 per cent at 103.50 yen. European stock futures were down 4.3 per cent at 1014.49, led by the banking sector.
Germany was forced to come up with a new rescue plan for mortgage lender Hypo Real Estate, and said it would guarantee private deposit accounts after it was forced.
"The sense that there won't be any coordinated action in Europe is undermining sentiment in the euro and the re-negotiation of the Hypo Real Estate deal soured sentiment," he added.
Meanwhile, Italy's second biggest bank UniCredit announced plans to raise new capital and Iceland worked on a plan to restore its financial sector.
The moves in Europe were in contrast to situation in the US, where the government's $700 billion bank rescue plan was finally passed through congress on Friday.
"The Paulson plan may be flawed, but it at least underlined that the drive for a solution to the problem is coming from the United States, and that is where the capital is likely to flow as a result, favouring the dollar," Daragh Maher, deputy head of global FX strategy at Calyon, said in a research note.
The dollar was also helped by strong dollar demand as global money markets remain frozen.
"The market is in an extreme state of paralysis," said BTM-UFJ's Hardman. "Global financial institutions are increasingly forced to procure dollar in the spot market and the dollar is rallying on the back of that."
Sterling was supported at lower levels against the euro however by expectations that UK authorities will take more measures to shore up its financial sector.
The euro was down 0.5 per cent at 77.37 pence after hitting a seven-month low of 77.12 pence earlier in the session.
Reuters