Spain and Italy reintroduced bans on short selling today to discourage speculative trading after stock markets fell steeply in response to fears that Spain might need a full-blown sovereign bailout.
The two countries had both banned short-selling last year, but they had lifted the bans in February.
The concerns about Spain, coupled with mounting worries that Greece may leave the euro, sent the euro sliding to a two-year low against the dollar and a near 12-year trough against the yen today.
Spanish bonds yields soared to their highest levels since the euro was created, despite euro zone finance ministers approving on Friday terms for a loan of up to €100 billion for Madrid to recapitalise its banks.
Ten-year Spanish government bond yields rose to 7.55 per cent after a second region said over the weekend it would ask for central government help to keep it afloat.
Analysts said this was the prime driver of the euro's fall. Murcia became the second Spanish region to request financial assistance from the government, after Valencia, with media reports suggesting six regions could seek aid.
"What began as a Spanish banking bailout looks to be moving rather quickly towards a possible sovereign bailout. Overlay that with increasingly negative news on Greece and you get a fairly negative mix, so the path of least resistance for the euro is down," said Jeremy Stretch, currency strategist at CIBC.
The euro fell to $1.20821, its weakest since June 2010 and creeping ever closer to the 2010 low of $1.1876.
After closing at $1.2163 in New York on Friday, it "gapped" lower to open at $1.2123 in Asia this morning, signifying the market perceived the value of the euro had dropped over the weekend in response to events in the euro zone.
Against the yen it dropped more than 1 per cent on the day to 94.23 yen, a level not seen since late 2000.The euro tumbled not just against safe havens like the dollar and the yen but also against currencies which usually fall in times of heightened risk aversion in financial markets.
It hit a record low versus the Australian dollar, a more than three-year low against sterling and a nine-year low versus the Norwegian crown.
The prognosis for Greece also appeared to darken, only adding to the reasons for investors to sell the euro. German magazine Der Spiegel reported yesterday that the International Monetary Fund may not take part in any additional financing for Greece, highlighting growing frustration with Athens.
Speaking two days before a team of international lenders arrive in Athens to push for further spending cuts in return for more rescue payments, prime minister Antonis Samaras said Greece was in a "Great Depression" similar to the United States in the 1930s.
Looking ahead, analysts said any weakness in euro zone provisional purchasing managers' surveys on manufacturing and services sector activity due tomorrow would only add to the gloom and intensify selling pressure on the euro.
Latest IMM positioning data showed bets against the euro increased further in the week ending July 17th - indicating it could be vulnerable to a squeeze higher - but strategists said the single currency would struggle to rebound given the steady flow of bad news.
"Flows that were working their way their way into the core are now looking to be increasingly leaving the euro zone altogether," said Ian Stannard, head of European FX strategy at Morgan Stanley.
"If it's a portfolio shift which is driving the market rather than speculative flows then the extreme reading on positioning data will persist."
With risk aversion back on the rise, the safe-haven US dollar and yen found good support. The dollar index jumped 0.4 per cent to a two-year high of 83.835 and the dollar also hit a 19-month high against the Swiss franc.
The yen was the biggest gainer, rising to a seven-week high of 77.94 yen per dollar.Japan's vice finance minister for international affairs was reported as saying the country will not exclude any options when responding to excessive currency moves, although market players said the authorities were unlikely to consider intervening while dollar held above 76 yen.
The euro fell against the Australian dollar to around A$1.1690 and hit a trough of 77.56 pence against sterling.But the Australian currency fell sharply against the dollar and was last down 0.8 per cent at $1.0288, with traders saying worries about slower Chinese growth only added to investor risk aversion.
Reuters
