Worries that Ireland's fiscal crisis could spread to other eurozone countries drove the euro down to a two-month low beneath $1.33 on Wednesday, and traders said the currency is probably in for more losses in the days ahead.
Though it traded in a wide range and had recouped most of its losses by midday in New York, traders attributed that to low volume ahead of a US market holiday for Thanksgiving on Thursday. The euro was still down 2.7 percent against the dollar since Monday and is down 4.4 percent so far in November.
Investors worried that a eurozone fiscal crisis centred for now on Ireland could spread to other indebted countries, notably Portugal and Spain. Ireland's four-year plan, announced Wednesday, to cut its budget by 15 billion euros did little to cheer the market.
The driver is "still Irish and eurozone concerns, and we will be talking about this well into 2011," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. "The market will continue to expect Portugal to apply (for aid) and then it will come down to Spain."
The euro was last down 0.2 percent at $1.3348, having hit a two-month low of $1.3284 and bouncing off its 100-day moving average - currently around $1.3297 - for the first time since early September.
Analysts are still looking for the euro to test $1.3232, the 61.8 percent retracement of its August-November rally, before targeting $1.3000.
The euro also hit a two-month low of 110.33 yen but recovered to 111.40 yen, up about 0.2 percent.
Higher US bond yields, which rose on data showing improved US labour market conditions, also kept demand for euros muted, as did the move by Standard & Poor's to cut its sovereign rating on Ireland.
"The US labour market has turned a corner, which should be very positive for the US economy in 2011," said Kathy Lien, director of research at GFT in New York.
Analysts said eurozone worries eclipsed concerns about tensions between North and South Korea, which exchanged artillery fire a day ago.
Most believed the clash would not escalate, though a North Korean statement on Wednesday said the South's action was driving the peninsula to the brink of war.
The dollar fell 1.2 percent against the South Korean won, erasing some of the 3.2 percent advance on Tuesday. The dollar also rose 0.3 percent to 83.44 yen. The US Dollar Index was flat after earlier hitting its highest level in two months.
Peripheral eurozone government bond yield spreads over Germany have widened, while a poor response to Germany's sale of 10-year debt also unnerved investors. Some traders said if investors were starting to also shun Bunds - considered a safe-haven asset - it was hard to see how the euro would stabilise in the near term.
The biggest concern for Europe watchers is Spain, the fourth-biggest economy in the 16-country eurozone and one that has struggled with a housing collapse and weak banks. Nomura strategist Jens Nordvig said the outlook on Spain will be a primary driver of the euro in the coming weeks.