INTERNATIONAL. The euro hit a four-month low against the dollar and 3-1/2 month trough versus the yen on Friday as concerns about a chaotic Greek exit from the euro zone and instability in the Spanish banking system fuelled demand for safer currencies.
Investors were reluctant to buy riskier assets after Moody's cut the credit ratings of 16 Spanish banks on Thursday. Fellow ratings agency Fitch downgraded Greece deeper into junk territory.
The euro tumbled to US$1.2642, within sight its 2012 low of US$1.2624. It has shed 4.1% against the dollar so far in May, while demand for the highly liquid dollar pushed it up 0.3% against a basket of currency on the day to a four-month peak of 81.758.
Against the yen, the euro fell to 100.219 yen, its lowest level since early February.
Many strategists said the euro would remain extremely vulnerable to further bad news out of the euro zone, and looked set to test the 2012 trough. A break below there would take the euro to its weakest level versus the dollar since August 2010.
"If it's not Greece, it's Spain that we talk about to sell the euro. People are looking for bad news and they are concerned there appears to be no solution for the situation," said Lutz Karpowitz, currency analyst at Commerzbank.
Greece will face fresh elections on June 17, with many investors increasingly concerned a victory for anti-bailout parties could lead to Greece exiting the euro zone.
A recent poll showed Greece's conservatives have overtaken the anti-bailout leftist SYRIZA in popularity, although the volatile political mood meant most analysts saw the outcome of the elections as a significant risk.
Financial instability also deepened in Spain, where the prospect of more state bailouts for banks pushed the country's borrowing costs higher.
One-month euro/dollar implied volatility climbed to around 11.65% while three-month risk reversals - a measure of relative demand for bets on the euro rising or falling - were trading at 3.4% premium in favour of more euro weakness, a near five-month high.
Some traders suggested the euro's decline could slow, given investors may be wary of holding positions over the weekend when a G8 meeting of leaders of major industrial economies takes place. No economic policy decisions are expected but officials said U.S. President Barack Obama hoped to promote discussion on steps to resolve the euro zone crisis.
"I get a sense that for now traders would want to square their positions heading into a news-packed weekend with G8 as the main event," said Sumino Kamei, senior currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
"After a sharp decline this month we may enter a wait-and-see mode around US$1.26, at least until Greek election in mid-June," she said.
Traders also cited options barriers at US$1.2625 and US$1.2600 that could provide some demand for the euro.
In a further blow to investor appetite to take on risk, U.S. data on Thursday showed manufacturing in the mid-Atlantic states unexpectedly contracted in May and new claims for U.S. jobless benefits last week were stuck at levels suggesting sluggish growth in hiring.
That helped the yen rally against the dollar, with the latter trading down 0.1% at 79.28 yen on trading platform EBS, near a three-month low of 79.13 hit on Thursday.
Traders cited stop losses orders below 79.00 yen and 78.80 yen, while offers were likely to cap dollar gains around 79.50.
Worried by the yen's renewed strength, Japanese Finance Minister Jun Azumi said in a veiled reference to intervention he was monitoring currency moves with extra care.