The euro dropped to a one-week low against the dollar after a Spanish ratings downgrade heightened concerns over the sustainability of government debt on the eurozone periphery.
The single currency suffered after rating agency Moody’s downgraded Spain to Aa2 from Aa1 with a negative outlook and warned of further cuts.
The agency said Madrid’s plans to clean up its banking sector would cost more than the government expected.
Analysts said the news helped shift the focus of forex investors back to sovereign concerns and away from interest rate differentials and the monetary policy divergence between the European Central Bank and the US Federal Reserve.
The downgrade took further steam out of the rally in the euro hawkish comments from Jean-Claude Trichet, president of the European Central Bank, last Thursday.
“While this should not come as too much of a surprise, it does put the focus back on the problems at the periphery of Europe once again, which investors had pushed aside following the ECB statement last week,” said Hans Redeker of BNP Paribas.
The euro had fallen 0.8 per cent to $1.3786 against the dollar by late in the day in New York.
The dollar found support as rising worries over global growth drove haven demand for the US currency.
Stocks suffered as news of a surprise Chinese trade deficit weighed on investor risk appetite. Commodity-linked currencies fell on fears of reduced Chinese demand for raw materials.
The Australian dollar lost 1.2 per cent to $0.9992 against the US dollar while the Norwegian krone fell 1.7 per cent to NKr5.6638.
The dollar also rose 1 per cent to $1.6048 against the pound, climbed 0.3 per cent to Y82.95 against the yen and was 0.3 per cent higher at SFr0.9321 against the Swiss franc.
The New Zealand dollar fell 0.3 per cent to $0.7347 against the US dollar after the Reserve Bank of New Zealand cut interest rates by 50 basis points to 2.5 per cent in an effort to help the economy recover following the recent earthquake.