The euro fell to a 10-week low against the dollar after Moody’s Investors Service said it may downgrade a number of banks with units in Eastern Europe, adding to concern financial turmoil in the region is worsening. The euro also weakened for a second day against the yen as stock markets fell, increasing the allure of the Japanese currency as a haven. The Polish zloty traded near a record low versus the euro after Deputy Prime Minister Grzegorz Schetyna said the weakening currency is “dangerous.” “The euro is tied to risk of the European banking sector and as a result some people see it as a lower quality instrument at the moment,” said Geoffrey Yu, a currency strategist in London at UBS AG, the world’s second-biggest foreign-exchange trader. “The situation in the banking sector is a lot worse than the European Central Bank is expecting. It’s like opening up a can of worms.” The euro declined to $1.2633 as of 7:09 a.m. in New York from $1.2801 yesterday. It touched $1.2603, the lowest since Dec. 4. The currency slid to 116.06 yen from 117.46 yen and to 88.61 British pence from 89.56 pence. The euro will trade at $1.25 in three months and “well below” $1.20 if the ECB starts to buy sovereign bonds in the most vulnerable euro-region countries such as Austria, Ireland and Greece to help bail out their banking industries, Yu said. ‘Fall Quickly’ “The euro will fall, and potentially quickly,” Greg Gibbs, director of foreign-exchange strategy in Sydney at ABN Amro Australia Ltd., a unit of ABN Amro Holding NV, wrote in a note yesterday. After dropping through $1.27, “it may quickly fall to $1.25, and potentially to the low last year of $1.233.” The dollar was at 91.85 yen from 91.73 yen, after touching 92.75, the highest level since Jan. 8. It advanced to $1.4259 versus the pound from $1.4298, and to 1.1697 Swiss francs from 1.1596. Eastern European banks, which are mainly subsidiaries of financial institutions such as Raiffeisen Zentralbank Oesterreich AG and Swedbank AB, are likely to come under “downward pressure” that may weaken their parent companies, Moody’s said in a report released today in London. The Moody’s report “triggered a fresh bout of risk aversion,” David Simmonds, head of global currency research in London at Royal Bank of Scotland Group Plc, wrote today. “Everything points to euro weakness.” The euro may fall to $1.233 over the next month, Simmonds said. Zloty, Forint The Polish zloty’s drop is “very dangerous” and the government will do “everything” to strengthen the currency, Schetyna said in an interview with Radio ZET. The Cabinet was due to discuss the currency’s weakness at a meeting today, he said. The Polish currency traded at 4.8812 per euro, near the record low of 4.9453 reached March 1, 2004. Hungary’s forint fell to an all-time low of 309.68 per euro before trading at 307.82. The MSCI World Index fell 1.3 percent, heading for its sixth consecutive decline, and futures on the Standard & Poor’s 500 Index dropped. The euro strengthened against the yen more than 96 percent of the time when the MSCI World Index rose this year, according to Bloomberg calculations. The euro pared declines after a report showed German investor confidence improved for a fourth month in February. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations rose to minus 5.8, from minus 31 in January. Economists expected a gain to minus 25, according to a Bloomberg News survey. The pound pared a drop against the dollar and extended gains versus the euro after a report showed inflation slowed less than expected, prompting speculation the Bank of England will slow the pace of interest-rate cuts. Consumer prices rose 3 percent in January from a year earlier, after increasing 3.1 percent the previous month, the Office for National Statistics said in London. ‘Economic Woes’ “Spreading economic woes in greater Europe, which also enhances expectations for more rate cuts there, may send the pound to a year-to-date-low of $1.35,” said Shigeru Nakane, a foreign-exchange dealer in Tokyo at Resona Bank Ltd., a unit of Japan’s fourth-largest banking group. The euro’s decline against the dollar and the yen accelerated after so-called stop-loss orders on investors’ positions on the currency were activated, said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “The stop losses were probably around $1.2720 and $1.27 in euro-dollar and about 116.80 in euro-yen,” Lee said. A stop-loss order is an automatic instruction to sell a currency should it reach a particular level. A more-than doubling of shipping costs this year suggests it may be time to buy the Norwegian krone, and the Australian and Canadian currencies, according to Federated Investments Inc. The 147 percent jump in ocean-transport prices is evidence that China’s $580 billion stimulus plan will lift raw materials, said Ihab Salib, who oversees $3 billion at Federated Investments in Pittsburgh. That would benefit countries exporting them, so Salib is “actively trading” kroner and Australian and Canadian dollars, nicknamed Aussies and loonies. Salib and other traders have started using the Baltic Dry Index’s global gauge of raw-material shipping costs to help make such decisions. The index and the value of a basket of those three countries’ currencies are increasingly moving in tandem -- 96 percent of the time in the past year, up from 84 percent in the past decade, data compiled by Bloomberg show.

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