The single currency took its worst one-day beating against the dollar in 15 months
The euro on Thursday extended hefty losses sustained the day before after Italian borrowing costs spiked, with the currency looking increasingly vulnerable amid fears that Italy's woes could overwhelm the eurozone's finances and spark global financial turmoil.
The single currency took its worst one-day beating against the dollar in 15 months on Wednesday after yields on two- and 10-year Italian bonds spiked above 7 percent, a level where the cost of financing a debt burden of more than €2 trillion is seen as unsustainable.
The euro hovered 0.1 percent softer at a one-month low of $1.3527, pulling further away from the previous session's high of $1.3860. It was likely to move towards a nine-month low of $1.3145 plumbed in early October, analysts said.
"The markets were basically in a panic yesterday and the only thing that can give the euro at least a temporary respite is quick action from the ECB to lower Italian yields," said Koji Fukaya, chief currency strategist at Credit Suisse.
The European Central Bank, the only effective bulwark against market attacks, bought Italian bonds in substantial amounts but remained reluctant to go further.
"The problem is that European leaders were supposed to do this before Italian debt got to this stage. The outlook from now on is very bleak," Fukaya said.
Two major clearing houses raised the level of collateral needed for those holding Italian government debt. The move makes it more expensive for holders of Italian debt to borrow against it and looks set to trigger a cycle in which rising yields fuel more fear and more selling.
The euro has pierced through the whole Ichimoku cloud on the daily charts in one day and its base, now at $1.3592, was seen as immediate resistance.
But with most players expecting further falls, support levels were eyed, with the most immediate one right below current levels around $1.3525 - an area that provided solid resistance when the euro climbed back up in a corrective short-covering rally from its early October low.
Further support was eyed at $1.3404 - the 76.4 percent retracement of that October rally, a level that coincided with the base of the weekly Ichimoku cloud.
European Commission President Jose Manuel Barroso issued a stern warning of the dangers of splitting the zone. EU sources told Reuters French and German officials had held discussions on just such a move.
Adding to Italian problems, the Greek Prime Minister George Papandreou said he was stepping down without saying who would succeed him as the nation heads towards bankruptcy, but party sources said leaders had agreed it would be the speaker of parliament.
Against the yen, the euro fell to a two-week low of 105.105 yen, still some distance away from the decade low of 100.77 yen hit in early October.
The sharp move lower in the euro saw the dollar index elevated to a one-month high of 78.00. The broadly firmer greenback also held steady against the yen at 77.76 yen , off 79.55 yen hit after intervention to stem the yen's rise by Tokyo.
Risk assets were hit hard with commodity currencies nursing hefty losses. The Australian dollar hovered near a one-month low, last changing hands at $1.0141 .
The market was waiting for Australian jobs data at 0030 GMT, with unemployment forecast to tick up to 5.3 pct. China is due to post trade balance numbers with expectations of its surplus widening to $24.9bn in Oct. There is no fixed time for the release of the data.