The euro hovered near two-month lows against the dollar on Monday while sterling sank more than three percent against the US currency, hurt by deepening worries over the financial sector and economic outlook. Nervy investors also boosted the Japanese yen as financial system concerns bubbled back to the surface.
Moody's Investors Service said it was cutting its long-term ratings on Barclays Bank, prompting bank shares iin Europe to take a battering. Little comfort was found from European data. The Markit Eurozone manufacturing purchasing managers' index (PMI) for January rose to 34.4 from 33.9 in December, compared with market forecasts for 34.5. But the reading still pointed to a deep recession
British manufacturing PMI was slightly better than expected at 35.8, although it was still the third-lowest since the series began in 1992. "The data wasn't as weak as expected, but it's probably the samllest crumb of comfort you could possibly find," Rabobank markets strategist Jeremy Stretch said.
By 1224 GMT, the euro stood at $1.2757, down 0.2 percent on the day after falling to $1.2704 - its lowest since December 5, according to Reuters data. Sterling was down 3.08 percent at $1.4058, and more than 2.9 percent weaker versus the euro at 90.72 pence, with moves exacerbated by thin conditions in London.
Traders said buying of euro/sterling by a large UK bank was accelerating the pair's rise and taking the sting out of euro/dollar's fall. Yen strength pulled the dollar down 0.9 percent to 89.17 yen , while the euro fell 1.1 percent to 113.75. The pound is also feeling pressure from expectations that the Bank of England will cut key interest rates by 50 basis points from the current historic low of 1.5 percent.
UBS strategists said however in a note to clients that sterling on a real effective exchange rate basis is the most undervalued currency versus its long-term trend. Meanwhile, the European Central Bank is expected to keep rates on hold at 2 percent when it meets on Thursday but take action in March as both growth and inflation slide to new lows, a Reuters poll showed.
"With the recent eurozone data indicating that there is still scope for the economic outlook to surprise to the downside, eurozone inflation in free-fall and well below the ECB's target rate while comments from the ECB have been rather dovish, a 50 bp cut in March appears very likely," Dresdner Kleinwort strategists said in a note.
The Australian dollar fell to a two-month low of $0.6248 as weak Australian housing data reinforced expectations of a bold rate cut on Tuesday. The New Zealand dollar fell to a six-year low of $0.4976. New Zealand wage growth eased from record levels in the fourth quarter, data showed on Monday, leaving the way open for more interest rate cuts.