The yen surged to a 10-year peak versus the euro and rose against the dollar as investors sought safe havens, heightening the risk of intervention by Japanese authorities.
Greece's credit default swaps hit new highs, while the spread between Greek and German 10-year bond yields increased to a record as investors feared the prospect of repeated fiscal slippage would cause Athens to lose aid and default on its debt.
That also raised worries about French banks, which reportedly have some of the biggest exposure to Greek debt. Sources said on Saturday that Moody's may downgrade France's banks, although France's finance minister said the lenders were solid enough to cope with any Greek crisis.
"With the intense negative feedback loops between the sovereign bonds and the banks' balance sheets, it is no longer clear to me that there are clean solutions to the problems in Europe, except for the introduction of a Eurobond," said Stephen Jen, managing partner of SLJ Macro Partners LLP in London.
"I see a drastic deterioration in general sentiment regarding the European debt and banking crisis in the coming weeks," he added.
The euro fell as low as $1.34949, its lowest since February, on trading platform EBS and was last at $1.3604, down 0.4 percent 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," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
Against the yen, the euro fell to 103.86 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 105.19 yen, down 0.6 percent on the day.
The dollar was down 0.3 percent at 77.33 yen, not far from its record low of about 75.941 yen struck in mid-August. Japan last intervened on Aug. 4 to weaken the yen.
BEARISH BETS ON EURO
Risk reversal spreads for euro/yen rose to their widest in over a year in favor of euro puts, suggesting investors are betting on further declines in the European common currency.
One-month and three-month euro/dollar risk reversals also showed a 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 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.
The Australian dollar, seen as a barometer of risk appetite, fell to a 1-month low of US$1.0256 as investors fretted that the global economy could be dealt a blow if euro zone debt woes deepen. It last traded at US$1.0281, down 1.8 percent.
The Canadian dollar fell to the lowest in more than 7 months versus the greenback, although it recovered in the New York session. The US dollar was last down 0.1 percent at C$0.9961.
Copyright Reuters, 2011