The euro fell against the yen and the dollar on Wednesday as investors were pessimistic about whether a European stimulus package will be sufficient to ease the financial crisis. Risk aversion kept hold in financial markets on fears about the looming global recession.
This pushed European shares down 1.2 percent and boosted the low-yielding yen, while further dollar repatriation flows and deleveraging supported the US currency. European Commission chief Jose Manuel Barroso proposed an EU-wide fiscal stimulus package worth 200 billion euros to revive economies across the region.
The draft proposal - which is due to be debated by member states next month - also said there is scope for further interest rate cuts by the European Central Bank. Analysts said that the plan marked a step in the right direction, but uncertainty about its efficacy, and general concerns about a deep slowdown in the global economy were keeping investors in the mood to sell risky assets.
"The sentiment is one of high risk aversion. The stimulus packages are a first step and are welcome, but the fundamentals across the world are still negative and recession fears are not fading," said Commerzbank currency strategist Antje Prafcke said in Frankfurt.
"There are still concerns about whether the measures will work and how they will be financed." The European plan follows the announcement on Tuesday of an $800 billion US plan to rescue its debt securities markets. The euro dropped 0.8 percent to 123.46 yen, while it slipped 0.7 percent against the dollar to $1.2969.
The dollar slipped 0.1 percent to 95.16 yen. Analysts said that the US currency was on the back foot against the yen as concerns remained about whether the Federal Reserve's plan would be effective. Some also worried about its impact on the nation's balance sheet.
The yen has rallied in the past month as risk aversion has triggered a massive unwind of carry trades, in which investors have used the low-yielding yen to fund purchases of assets in higher-yielding currencies. The Japanese currency pared some gains, however, after China surprised markets with a 108 basis point rate cut, its largest since 1997.
The yen is often used as a proxy for the Chinese yuan, which trades in a tight band against the dollar. "The China rate cut reinforces the notion of global co-ordinated action to counter the downside risks to the global economy, which will erode the attraction of the yen safe haven quality," said Lena Komileva, G7 market economist at Tullett Prebon.