Currency markets steadied after hefty moves in Asian and early European trading, with the euro bouncing off recent lows against the dollar and yen, but the common currency remained weak amid fears that the euro-zone sovereign debt crisis is spiralling out of control.
The euro was recently trading at $1.36221 U.S. compared with $1.3657 U.S. late Friday in New York. The dollar was at ¥76.948 compared with ¥77.60, while the euro was at ¥104.810 compared with ¥105.94. The pound was at $1.58683 compared with $1.5883 U.S.
After dropping to a seven-month low under $1.35 U.S. in Asia, the single currency staged a mild recovery across the board in European hours, rising back above the key $1.36 U.S. level, while bouncing off 10-year lows against the yen. But with fears growing about Greece's ability to avoid a default, this pickup is unlikely to last, market participants said.
Heightened worries about the euro-zone debt crisis have gripped financial markets Monday with safe-haven German bund yields falling to new record lows, while bond prices from highly indebted euro-zone countries fell.
The surprise resignation on Friday of Jürgen Stark from the executive board of the European Central Bank, and comments from German Economy Minister Philipp Rösler that Europe could no longer rule out an "orderly default" for Greece, contributed to the gloom.
There are also expectations that Moody's Investors Service Inc. could downgrade French banks this week, leading to a rout in French stocks while the cost of insuring them against default soared to their highest-ever levels.
For now, the euro has some respite from the nerves as the market consolidates from recent losses, but the market remains highly sensitive to euro-zone headlines this week, market participants say.
Against this backdrop, all eyes remain on the yen and whether authorities there respond to appreciation pressures, as the Japanese currency—treated as a safe retreat in times of stress—pushed higher across the board.
Earlier Monday, the euro fell to a fresh 10-year low of ¥103.900 before recovering. It still remains extremely weak, with the euro at ¥104.800.
Euro derivatives show that investors are bracing for very large moves over the next month, with so-called implied volatilities reaching the highest level since June 2010.
The rout is not limited to the euro. Other currencies with close links to investor sentiment -- particularly the Australian and Canadian dollars -- fell sharply, while emerging-market currencies also tumbled.
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