The euro sank to fresh one-year lows today, with its sell-off deepening as fears about contagion in the euro zone gripped investors, while the dollar was the chief beneficiary of the rising risk aversion.
The euro notched another one-year low at $1.2936, with analysts and traders citing $1.2880-85 as the next target, the low of April last year, and a breach there seen as opening the way for a test of $1.25, a level not seen since March 2009.
The euro shed more than 1.5 per cent yesterday, its steepest one-day loss since last June, and broke through key support around $1.30, fuelled by concerns that Greece's debt problems would spread to other economies such as Spain and Portugal.
"A nice downtrend has been established in the euro. I suspect the market wants to take the euro to as low as $1.25 in the short term," said Jonathan Cavenagh, currency strategist at Westpac in Sydney.
The single currency slid 0.2 per cent to $1.2956 earlier tiday. It has lost nearly 3 per cent just this week, as investors remain highly sceptical Greece will be able to carry out the tough austerity measures it promised in return for €110 billion aid package from the European Union and the International Monetary Fund.
Spreads between benchmark German Bunds and Portuguese and Spanish bonds widened yesterday, while the cost of insuring against a Greek default rose. The two-year Greek yield surged by more than 400 basis points to over 16 per cent in one its biggest one-day drops since the Greek debt crisis erupted earlier this year.
The euro also fell to its weakest level against the pound in nearly nine months, stumbling to 85.57 pence, according to data, down about 0.2 per cent on the day.
Fears about the spread of Greece's debt crisis have driven investors to the safety of the Japanese yen and the US dollar, considered safe-haven investments when risk aversion spikes.
World stocks also fell to eight-week lows today as investors fretted that a debt crisis would spread to other euro zone countries.
Shares in Spain and Portugal, two of the weaker euro zone members, fell 2 per cent, and the FTSEurofirst 300 index of leading European shares dropped 0.75 per cent to two-month lows.
In Dublin, the Iseq index of shares fell 38 points to 3,261 shortly after opening, with all the main financials in negative territory.
World stocks as measured by MSCI fell half a per cent to their lowest since early March, while the more volatile emerging equities index fell 1.5 per cent.
Asian markets also weakened. Shanghai's key index fell as much as 2 per cent to its lowest in seven months, suffering from Beijing's weekend moves to tighten policy.
"Everything really depends on what news flow comes out of Europe over the next few days," said Gareth Berry, currency strategist at UBS in Singapore. "Our analysis shows people are not just short-covering, they have been buying the dollar for the past couple of weeks."