The euro hit a nine-month low against the dollar and a 10-year trough against the yen on Tuesday as eurozone policymakers failed to quell rising speculation of a Greek debt default, hitting riskier currencies and boosting the greenback.
The single currency fell to $1.3145, its weakest since January as a 3 percent slide in European stocks and a collapse in the shares of Franco-Belgian banking group Dexia - which has hefty exposure to Greek debt - pushed investors into the safety of the world's most liquid currency.
Investors see a growing possibility of a default in Athens as eurozone finance ministers look to force banks to take bigger losses on their Greek debt holdings, while the next aid tranche for the country has been delayed until mid-November. Dexia's precipitous drop highlights the potential impact of a Greek default on the eurozone banking sector. The euro pared some of its losses to trade 0.2 percent higher on the day at $1.3200, but traders and analysts said the move was driven by profit taking on the latest slide, and many expected it would fall further.
"The newsflow remains very much on the negative side, so we have to be cautious about the rebound in the euro," said Ian Stannard, currency strategist at Morgan Stanley. Market participants said an option with a strike price of $1.32 was expiring later in the day, which may anchor the single currency in the very near term. Stronger demand was located around large $1.3100 barriers. Stannard at Morgan Stanley anticipated more weakness for the euro, particularly given that the European Central Bank may be poised to signal it will ease monetary policy to support the eurozone economy through the debt storm.
As a result, the euro could fall below $1.30 this week, he said, while strategists at Barclays Capital forecast a fall to $1.25 in the next three months. "The market is increasingly worried about the ... Greek crisis and the calamity that could be created if there was a messy default." said Jane Foley, senior currency strategist at Rabobank.
The euro also hit a 10-year low of 100.77 yen before recovering to trade with gains of 0.3 percent at 101.10. Some analysts said extreme short positioning for the euro could limit scope for significant falls in the near term. The dollar was a big beneficiary of the euro's weakness, climbing as high as 79.823 against a currency basket, its strongest since mid-January. It also hit a six-month high versus the Swiss franc.
The greenback was little changed against the yen at 76.68 yen. The Australian dollar hit a one-year low of US $0.9414, down around 15 percent from a 29-year high reached in July, as an increasing number of investors start to worry about Chinese growth, which many had counted on as the main growth driver globally as developed economies flop.