Concerns about a slowing global economy prompted investors to seek safety on Thursday, driving the dollar and yen sharply higher and the euro to a two-year low against the US currency. South Korea's surprise rate cut on Thursday, following Brazil's 50 basis point rate cut on Wednesday evening, as well as an unexpected drop in employment in Australia underscored the scope of the economic slowdown worldwide.
Markets were disappointed about the lack of prospects for new stimulus measures in the United States after the minutes of the Federal Reserve's June meeting, released on Wednesday, showed that the fragile recovery might need to weaken further before policymakers agree to take more action.
"This is leading to the sell-off in all risk assets," said Kathy Lien, managing director of FX strategy for BK Asset Management in New York.
Investors were also cautious ahead of Friday's release of Chinese economic data, which is expected to show growth slowed to 7.6 percent in the second quarter, the worst performance since the 2008-2009 financial crisis.
"A simultaneous slowing in the US, euro zone and China points to a much rougher second half of the year than the first half of the year," Lien said.
The dollar index, which tracks the greenback versus a basket of six currencies, rose to 83.829, the highest since July 2010. It was last up 0.1 percent at 83.608.
The euro was down 0.3 percent to $1.2205 after dropping to $1.2165 on Reuters data, the weakest since the end of June 2010.
Key support lies in the $1.20 area, and a break below that could see the currency slide toward its June 2010 low of $1.1875, which marked the weakest since March 2006.
Camilla Sutton, chief currency strategist at Scotia bank in Toronto, said a test of the $1.1875 low is a material risk, but the threat could be temporary given chances of the Fed undertaking a new round of bond buying, which would weaken the dollar.
"As long as the door is open to QE3, it is difficult to see an environment where the dollar can prove materially and sustainably strong," she said. "Accordingly, we continue to expect the euro to trend lower but avert a collapse."
Against the yen, the euro fell to a six-week low of 96.40 yen. It last traded at 96.74, down 0.9 percent on the day.
Nomura in a note said it revised down its euro/dollar forecasts. The bank now expects the euro to slide to $1.18 by the third quarter and $1.15 by year-end, compared with previous forecasts of $1.25 and $1.23, respectively.
The euro has shed 5.9 percent versus the dollar so far this year, almost double the losses it chalked up for all of 2011.
The dollar slipped 0.6 percent to 79.28 yen after the Bank of Japan held off on further policy easing despite slowing global growth, convinced that robust domestic demand will keep Japan's economic recovery on track.
The Australian dollar tumbled 1.1 percent to $1.0139 after a closely watched employment report showed a fall of 27,000 jobs versus expectations for a flat reading.
The New Zealand dollar lost 0.9 percent to $0.7902.
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