The single euro zone currency see-sawed between losses and gains in New York, advancing earlier after government assurances that France could withstand a Greek crisis.
The yen, meanwhile, was a big beneficiary of safe-haven flows, surging to a 10-year peak versus the euro and staying well-bid against the dollar. That increased the risk of intervention by Japanese authorities.
"A Greek default is probably a long way away and my view is that as long as Greece is showing it is willing and able to initiate measures deemed satisfactory, you won't see any refusal to provide funds," said Ray Attrill, senior currency strategist at BNP Paribas in New York.
"But until we see a confirmation that Greece's measures are satisfactory from those providing the loans, then that should keep the euro under some kind of stress."
The more imminent risk, however, is a potential cut in the rating of French banks, analysts said. A report on Friday suggested Moody's may downgrade France's banks after it placed them on CreditWatch negative in June.
French banks reportedly have some of the biggest exposure to Greece and could be vulnerable if the government defaults on its debt. French Finance Minister Francois Baroin tried to ease fears about the banking sector, saying the lenders were solid enough to cope with any Greek crisis.
That spurred euro buying early in New York, but the rally was short-lived.
The euro fell as low as $1.34949, its lowest since February on trading platform EBS, and was last at $1.36490, slightly down on the day. Traders said it came off lows on bargain hunting from European funds and sovereign investors, but analysts expected further falls.
"We don't see a reversal in the euro until we get back above $1.38, and in the meantime, $1.37 is a good place to take profits," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
Against the yen, the euro fell to 103.90 yen, its lowest in 10 years, according to Reuters data, having broken below big option triggers at 105 yen and 104.50 yen. It was last at 105.21, down 0.7 percent on the day.
Japan last intervened on Aug. 4 to weaken the yen and steer it away from record highs against the dollar. The dollar was last down 0.5 percent at 77.15 yen, not far from its record low of about 75.94 yen struck in mid-August.
The Australian dollar, seen as a barometer of risk appetite, fell to a 1-month low of US$1.0276 as investors fretted that the global economy could be dealt a blow if euro zone debt woes deepen. It last traded at US$1.0338, down 1.2 percent.
The Canadian dollar also fell to a roughly seven-month low versus the greenback, although it recovered in the New York session. In mid-day trading, the US dollar was down 0.2 percent at C$0.9952.
BEARISH BETS ON EURO
As market players bet on a further fall in the euro against the yen, risk reversal spreads for euro/yen rose to their widest in over a year in favor of euro puts, or bets on the euro falling.
One-month and three-month euro/dollar risk reversals also showed a fresh record high bias for euro puts.
The latest data from the Commodity Futures Trading Commission showed speculators added to bearish bets against the euro in the latest week to Sept. 6. Net short positions stood at 36,443 contracts, up from 384 contracts.
Christian von Strachwitz, chief investment officer at Quaesta Capital in Switzerland, said short euro/dollar positions dominated the latest week's portfolio, with the greenback having the largest inflows. The Canadian dollar, meanwhile, showed the largest outflows. Quaesta is a currency fund of funds with assets of $3 billion.
Although traders said the euro may have been oversold in the very short term, analysts saw plenty of room for more falls, particularly once it breaks below $1.35.
Copyright Reuters, 2011