The euro tumbled to a one-year low beneath $1.31 today, hit by fear that emergency aid for Greece may not prevent debt crises in other euro zone countries.
Strong economic data has also reinforced views that the US economy is on the mend and that the central bank could raise interest rates this year, boosting the dollar.
Europe's debt woes are likely to keep euro zone rates on hold in 2010. Even with Greece set to receive €110 billion in emergency loans from the European Union and IMF, investors remained on edge about the fiscal health of other euro zone countries, including Spain and Portugal.
The IBEX 35 index of Spanish shares was down almost 4 per cent. Investors also fretted about Greece's ability to enact promised spending cuts as unions staged strikes, shutting down tax offices, government ministries, schools and hospitals.
"There is no faith in what the EU and IMF have proposed for Greece," said Dean Popplewell, chief currency strategist at OANDA, a foreign exchange brokerage in Toronto.
"Capital markets are betting on a Greek default, as Greece's own populace is not going to accept the terms of this rescue, and contagion is a real concern hurting the euro." The euro fell 0.9 per cent to $1.3073, according to Reuters data, its lowest level since April 2009.
Mr Popplewell said traders were gunning for a move below $1.30, which would prove strong support for the single currency. "But once it goes, the euro will fall like a lead weight, with $1.25 possible," he said. Traders said any move higher would likely be capped at $1.3170 and then $1.3230.
Benchmark euro zone government bonds were stronger as investor sought relative safety in the currency union's core.
Two-year bond yields were down seven basis points at 0.782 percent, with 10-year yields down six basis points at 3.008 per cent. Spreads between benchmark Bunds and Portuguese and Italian bonds widened and the cost of insuring against a Greek default rose.
The European Union's financial services chief said today he would investigate how credit rating agencies work following what he said was a surprisingly rapid downgrading of Greece.
"I think we need to go further to look at the impact of the ratings on the financial system or economic system as a whole...," European Internal Markets Commissioner Michel Barnier told members of the European Parliament.
"That's why I asked for responsibility to be assumed in the work they are doing." Barnier added: "If you look at Greece, for example, I was quite surprised by the quite rapid deterioration in rating." His comments follow a reminder from the executive European Commission to rating agencies to be careful in their work.
As the European commissioner in charge of financial services regulation, Barnier could propose new rules governing rating agencies. He said today it could be possible to start a European agency to rate countries' creditworthiness.