The euro fell to a 10-year low against the yen and its lowest in more than 15 months versus the dollar on Thursday after high borrowing costs at an Italian bond sale fuelled investor concerns about the euro zone crisis.
Italy sold €7.02-billion of three-year and 10-year bonds. Yields were lower than at previous sales but cautious investors still demanded a near 7 per cent yield to buy 10-year paper, a level seen unsustainable.
The euro hit a trough of $1.2858 against the dollar, its weakest since September 2010, after triggering reported stop loss orders below $1.2880. Trading was thin, however, with individual orders exaggerating moves.
Analysts said that with the euro having broken decisively below $1.30, this level would act as technical resistance, with many expecting a move towards $1.25 in the coming months.
"The euro remains biased towards the downside, not just from a debt crisis perspective, but also from a fundamental perspective, with the European Central Bank expected to move towards more aggressive quantitative easing," said Audrey Childe-Freeman, EMEA head of currency strategy at JP Morgan Private Bank.
"The Italian auction result was not a disaster, yields were lower but the bid-to-covers were a bit weaker, so it's certainly not an all-clear on the debt crisis."
Against the yen, the euro hit a 10-year low of ¥100.05 on the EBS trading platform, driven by selling from Japanese retail investors and exporters, with moves amplified in poor year-end liquidity.
There was market talk of an option barrier at ¥100.00, suggesting the euro could draw support from demand from options players just above there. However, its falls may gain momentum if that level is breached, with one trader saying there were large stop-loss euro offers at ¥100.00.
Analysts said the euro was likely to stay vulnerable to further falls as the debt crisis in the region remains acute.
"The trend is still there for a weaker euro," said Carl Hammer, currency strategist at SEB in Stockholm, adding SEB sees the euro at $1.25 by the end of the first quarter of 2012.
"Italy have a massive refinancing need early next year and markets are a bit worried about it."
However, he said year-end flows tend to be negative for the dollar and this could temper euro falls versus the U.S. currency before the New Year weekend, while traders cited some talk of euro zone exporter demand to buy euros.
The euro's drop helped lift the dollar to $80.854 versus a basket of currencies, its highest level since January. The greenback eased 0.1 per cent to ¥77.83.
The single currency extended falls from Wednesday. Some market players said investors were spooked by European Central Bank data showing euro zone banks deposited a record €452-billion with the central bank.
Signs banks were hoarding cash came just days after the ECB provided them almost half a trillion euros worth of three-year loans at cut-rate prices to encourage lending. The new data suggested European banks are still distrustful of lending to each other, preferring to deposit money with the ECB.
On Thursday, ECB data showed banks deposited €436-billion in the overnight facility, marginally down from the previous day but still at an elevated level.