The yen and the Swiss franc led a broad rally in safe-haven currencies on Monday, while the euro pared gains against the dollar on heightened sensitivity to risk in eurozone bond markets. The premium that investors demand to hold 10-year Irish and Greek government bonds rather than German Bunds widened on Monday, while the cost of insuring their debt against default also increased, highlighting investors' concerns about peripheral eurozone economies.
Benchmark 10-year German yields earlier hit a record low on worries about a faltering global economic recovery. The Swiss franc and the Japanese yen, both used to fund leveraged carry trades, are usually sought in times of market stress. "Spreads in the peripherals are wider, financial stocks are down and the Swiss franc is outperforming on safe-haven demand," said Kenneth Broux, Markets Strategist at Lloyds Banking Group.
By 1128 GMT, the dollar was down more than 1 percent to 1.0400, having tested a one-week low of 1.0352 francs earlier in the session. European banking stocks traded down around 0.8 percent.
The euro was trading 0.6 percent lower against the Swiss franc at 1.3325, having dropped to 1.3268 for the first time since July 8. Traders said funds were lightening positions in the euro/Swiss franc cross with sparse liquidity in currency markets exacerbating the fall.
The sell-off in the euro/Swiss franc cross saw the euro trim gains against the US dollar. It fell to $1.2810 from a session high of $1.2836 and not far from one-month lows of $1.2734 hit in Asian trade on trading platform EBS. That marked the sixth straight day of lower daily troughs for the single currency. The euro also gave up earlier gains against the yen, falling 0.3 percent to drop to 109.62 yen and not far from one-month lows of 109.25 yen struck in Asian trade.
The yen's gains came despite weaker-than-expected Japanese gross domestic product (GDP) numbers. Anaemic economic growth and a rising currency are likely to pose a headache to Japanese policymakers in coming days. Investors are wary of a possible meeting between Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa later this week to discuss the currency's strength and possible responses.
Some traders said Japan's weaker second-quarter GDP data could increase incentives for Japanese authorities to curb the yen's strength. The dollar was down 0.8 percent at 85.48 yen with investors like hedge funds still preferring to go short on the greenback and long on the yen as US yields continued to tumble.