LONDON: The euro fell to a near four-month low on Monday as political turmoil gripped Greece, highlighting the risk the country may exit the euro zone, while worries about slowing Chinese and global growth drove down higher-yielding currencies.
Safe-haven currencies including the dollar and the Japanese yen rose as coalition talks in Greece hit an impasse on Sunday, increasing the chance of another election.
Euro zone industrial production unexpectedly fell in March, adding to signs the bloc is heading into recession and further fuelling bearish sentiment, while Spain's short-term debt costs rose at auction and its 10-year yields soared.
The common currency fell to $1.2861 on trading platform EBS, its lowest level since Jan. 23. It has lost 2.7 percent so far this month after losing 0.8 percent in April.
Analysts said the euro could hit the 2012 low of $1.2623 in coming weeks, with some forecasting a break towards $1.20.
"It feels like we are coming to some sort of denouement, it looks increasingly likely Greece will have to leave (the euro zone). This is what is going to blight the markets for the next few weeks," said Neil Mellor, FX strategist at Bank of New York Mellon.
"The short-term target in the euro is the 2012 low and there is very little standing in the way of some fairly big falls."
Benchmark Spanish 10-year government bond yields were trading at 6.32 percent on Monday, closing in on the 7 percent level that is seen as unsustainable, in a sign Greek political instability was weighing on the euro zone periphery as a whole.
Adding to headwinds for the euro, Chancellor Angela Merkel's conservatives suffered a crushing defeat on Sunday in an election in Germany's most populous state, a result which could embolden the left opposition to step up attacks on her European austerity policies.
Some analysts said the European Central Bank may eventually adopt further monetary easing to support the economy, which could add to euro weakness. With the US economy still holding up, doves in the Federal Reserve are likely to be kept at bay, offering further support to the dollar.
"The prospects for the euro's downside have grown, and our six-month forecast is $1.25 and $1.20 in 12 months for euro/dollar," said Raghav Subbarao, currency strategist at Barclays.
"The key driver in our opinion will be how the ECB reacts to the situation. We expect the ECB to ease policy, maybe through unconventional policies in coming months to support the situation in the periphery."
Underscoring increasingly bearish market sentiment toward the euro, data from the US Commodity Futures Trading Commission showed currency speculators increased their net short positions in the single currency in the week ended May 8 to the highest level since mid-February.
Traders and analysts said with many speculators already running bearish positions against the euro, the speed of the common currency's fall may slow in coming days.
AUSSIE BREACHES PARITY
The safe haven dollar rose, while currencies sensitive to shifts in risk appetite came under pressure. The dollar index rose to a two-month peak of 80.598.
The New Zealand dollar hit a four-month low of $0.7765 , while the Australian dollar dipped below parity versus the US dollar for the first time in about five months, slipping to as low as $0.9963.
The Aussie failed to gain even after China's central bank cut the amount of cash that banks must hold as reserves on Saturday, freeing an estimated 400 billion yuan ($63.5 billion) for lending to head off the risk of a sudden slowdown in the world's second largest economy.
Broad dollar demand pushed the greenback up 0.4 percent against the Swiss franc to a near four-month high of 0.9338 while it was steady against the yen at 79.96 yen.
Traders said the dollar also gained some support versus the yen after Japanese Prime Minister Yoshihiko Noda told The Wall Street Journal over the weekend that all options were on the table for dealing with the strong yen, although he stopped short of saying that the currency was overvalued.
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