The euro tumbled against the dollar and the yen on Wednesday after Fitch downgraded Russia's long-term foreign and local currency ratings, sparking fears of a steep downturn in eastern Europe. The yen and the dollar also gained broadly on a renewed flight into perceived safer assets as investors fretted about the outlook for the global economy, with jitters setting in ahead of key US non-farm payrolls data on Friday.
The dollar extended gains against the euro after a report from Challenger pointed to a sharp deterioration in the US jobs market, showing planned layoffs in the country at a 7-year high. Further indications on the US jobs market are due at 1315 GMT, when ADP private US payrolls numbers are released.
"Sentiment can turn on a dime and the more optimistic sentiment from yesterday has reversed today," Westpac economist James Shugg said. At 1251 GMT, the euro fell 1.4 percent against the dollar to $1.2849 and by 1.7 percent against the yen to 114.43. The dollar index gained around 1 percent to a session high of 85.920. Against the yen, the dollar dipped 0.3 percent to 88.97.
The euro fell below $1.29 against the dollar late morning after Fitch downgraded Russia's ratings to 'BBB' and said more cuts were possible due to low commodity prices, dwindling reserves and corporate debt problems. This has sparked concerns that a sharp downturn in the region could hit the eurozone economy hard.
"Any bit of news of further damage to customers of the euro zone is not helpful for the euro," Westpac's Shugg said. Analysts also noted that as outflows from Russia have put pressure on the rouble, Russian authorities have to sell euros to maintain the balance of their reserves portfolio, further weighing on the single currency.
"The Russian central bank is obviously being very active in the management of its currency within the basket," BNP Paribas senior currency strategist Ian Stannard said. Data released earlier showed deterioration in the euro zone's dominant services sector slowed slightly in January, but separate numbers showed eurozone retail sales fell more than expected year-on-year in December.
Heightened risk aversion also hit the Australian dollar, which fell 1.7 percent against the US dollar to $0.6414 and by around 1.8 percent against the yen. Analysts were also nervous ahead of rate decisions by the European Central Bank and the Bank of England on Thursday.