The euro slid to a 2-1/2-year low against the yen on Monday as investors shifted their focus to banking problems in Europe after leaders of Europe's four biggest economies decided against a co-ordinated bank bailout.
Traders said the failure of European leaders to come up with a unified plan dealt a big blow to investor confidence and stirred more worries about the troubles plaguing the global financial system, prompting heavy selling of risky positions in carry trades and stocks.
The Australian dollar plunged more than 5 percent against the yen at one point to a four-year low as investors were forced to dump long-standing carry trades favouring higher-yielding currencies.
Japanese investors, including institutional ones such as life insurers and commercial banks, were seen repatriating some of their hefty overseas assets as they sought the shelter of moving money back home, traders said. Japanese retail margin traders were also seen as big forced sellers of the Aussie.
Market players said many investors around the world are spooked by the damage to the financial system and only want to deal with banks considered the very safest in the deepening crisis that has claimed institutions on both sides of the Atlantic. Stock markets around Asia tumbled between 4-5 percent.
"It's just people taking risk off the table," said one trader at a European bank in Tokyo. "All unwinding and de-leveraging." German and French officials denied on Sunday that they were set to endorse a common fund to bail out European banks. The comments came after European leaders issued a joint statement after a summit in Paris that made no mention of a fund.
But the troubles in Europe were made clear after the German government and banks were forced to come up with a new rescue package for mortgage lender Hypo Real Estate over the weekend. Germany and Denmark also issued a guarantee on bank deposits, while Iceland said a bank stability plan was in the works.
The euro shed 1.1 percent at $1.3617 after plumbing a 13-month trough of $1.3595 on trading platform EBS. The single currency slid 3 percent to 140.46 yen and struck a 2-1/2-year low of 139.96 yen. "The euro is under selling pressure on disappointment and a bleak outlook for Europe's banking sector after European officials failed to come up with something similar following US approval of the bailout plan," said a senior dealer at a Japanese trust bank.
The US House of Representatives voted 263-171 to pass a $700 billion rescue package for the US financial sector on Friday, which was promptly signed by President George W. Bush. But relief over the measure, which will allow the US Treasury to buy illiquid mortgage assets from banks to try and get credit flowing between banks again, proved short-lived.
Investors also remained wary of the US banking sector, keeping the dollar's upside limited and leaving the yen by default to benefit as investors reduce risk exposure, they said. The dollar index, which tracks the dollar's value against a basket of six currencies, rose to a 13-month high of 81.170 But gains were limited as the dollar dropped 2 percent to 103.19 yen and hit a nearly five-month low of 102.85 yen.
Japanese investors were big sellers of the euro and Australian dollar and rushing to buy back the yen. The Aussie tumbled 5.4 percent to 77.09 yen and struck a low of 76.60 yen before the Reserve Bank of Australia is expected to cut rates by 50 basis points on Tuesday to 6.5 percent.
Talk continued to swirl that major central banks could cut interest rates in a co-ordinated move to bolster confidence and help thaw the freeze in money markets that is threatening a deeper global economic downturn.