The euro neared a one-year low against the dollar and hit a 10-year trough against the yen on Wednesday after data showed eurozone banks were still hoarding cash, spurring fears of a growing liquidity crunch the day before an important Italian bond sale.
Year-end conditions kept volumes light, but traders said investors in the market were spooked by European Central Bank data showing euro zone banks deposited a record 452 billion euros ($585.18 billion) with the central bank. Signs that banks were hoarding cash came just days after the ECB provided banks almost half a trillion euros worth of three-year loans at cut-rate prices to encourage lending and ease strains caused by the eurozone's two-year-old sovereign debt crisis. "If European banks are still this concerned, it's not a good sign," said Karl Schamotta, senior markets strategist with Western Union Business Solutions.
The euro fell as low as $1.2910, the lowest level since January 10, before clawing back to $1.2934, about 1 percent below its level late Tuesday in New York. The slide below $1.30 triggered automatic sell orders that sped up the slide, traders said. Against the yen, the euro hit its lowest level since June 2001 at 100.70. Investors often flock to the dollar and yen in times of trouble. The dollar was up 0.1 percent at 77.90 yen.
Safe-haven demand also lifted the dollar 0.9 percent against the Swiss franc to 0.9424 franc, while sterling shed 1.4 percent to $1.5451. Yields on 10-year US Treasuries fell back below the 2 percent mark, a sign of strong demand. The yen's surge will not delight policymakers in Tokyo, as it makes Japanese exports more costly, weighing down stock prices and putting more pressure on the sluggish economy.
Japan's Finance Ministry intervened several times this year to weaken the yen by selling it on the open market. Whether they will act again, though, is unclear, particularly after a semi-annual US Treasury report criticised two bouts of solo yen selling in August and October.