The euro fell to its lowest in almost two weeks against the dollar on Monday and more losses were expected as investors bet a European summit will fail to find a solution to the region's debt crisis.
Investors parked money in perceived safe havens, driving up the dollar and pushing the yen almost 2 per cent higher against the euro. Higher-yielding riskier currencies such as the Australian and New Zealand dollars tumbled.
Expectations for the two-day EU summit are quite low after a meeting of the euro zone's four biggest economies on Friday, at which Germany resisted pressure for common euro zone bonds or a more flexible use of Europe's rescue fund.
A German government spokesman said on Monday that Chancellor Angela Merkel was worried that just before the summit, people were expressing a wish for "supposedly easy solutions" such as shared liability.
"Again we are likely to get frustrated on the lack of a solution for the debt crisis," said Brad Bechtel, managing director at Faros Trading in Stamford, Connecticut.
"We are only likely to receive the telegraphed European 'blueprint' for the way forward, something that is long term in nature and several referendum and parliamentary wrangling sessions away from here."
The euro fell as low as $1.2469, the weakest since June 12, and was last down 0.6 per cent at $1.2496. Support was seen near the June 12 low around $1.2441, using Reuters data, and strategists said a break below that level would open the door to a test of the June 1 two-year low of $1.2286.
Spain formally requested euro zone rescue loans for up to €100-billion euros ($125-billion U.S.) to recapitalize its debt-laden banks, saying the final amount of financial assistance would be set at a later stage.
Some market economists believe the rescue is merely a prelude to a full bailout for the Spanish state, which saw its annual borrowing costs soar to euro era record levels above 7 per cent early last week before easing.
With Spain, the fourth largest euro zone economy in focus, investors are also looking to how Italy, the third largest euro zone economy, is faring. Italy will sell zero-coupon and inflation-linked bonds on Tuesday and medium- and longer-term bonds on Thursday..
The sharp rise in the financing costs of Spain and Italy has been accompanied by their shift towards shorter-dated issuance, potentially building up even bigger future refinancing hurdles. .
The last time Spain issued bonds maturing in more than 10 years was in July 2011, according to Reuters data. Italy has only done so twice in the same period.
A German government spokesman said the EU probably will not take any decisions on Greece at this week's summit, dashing Athens' hopes it might ease the terms of its bailout.
Weak euro zone economic data and rising borrowing costs for peripheral countries will likely heap pressure on the European Central Bank to cut interest rates or expand liquidity operations, prospects likely to keep the euro subdued.
"You have economic growth in the States probably running at about a 2 per cent annualized rate, and you've got growth in Europe a lot slower than that, so therefore in the relative growth scenario you would still favor the U.S. and that's probably attracting cross-border flows," said Ken Dickson, investment director of currencies at Standard Life Investment.
Against the yen, the dollar fell 1 per cent at 79.58 yen . The euro lost 1.6 per cent and last traded at 99.46 yen after earlier falling to a one week low.
Traders have piled back into the dollar since the Federal Reserve held off on aggressive quantitative easing last week and instead extended its "Operation Twist" program, under which it sells short-term bonds and buys longer-term securities to lower longer-term interest rates.
The Australian dollar fell 0.7 per cent to $0.9992. The New Zealand dollar dipped 0.3 per cent to $0.7865.