The euro struck a new two-month low against the dollar on Wednesday as concerns mounted surrounding the ill health of European banks, dealers said.
In Asian trade, the European single currency dropped to 1.2558 dollars, a level last seen on December 4. It later recovered slightly to change hands at 1.2568 dollars, against 1.2585 late in New York on Tuesday.
Against the Japanese currency, the dollar increased to 92.52 yen from 92.39 yen on Tuesday. Gold briefly reached a seven-month high 974.32 dollars an ounce.
"Many players are now thinking that economic conditions are worse in Europe than in the US," Hiroshi Maeba, a senior dealer at Nomura Securities, told Dow Jones Newswires.
"Economic conditions in the US are not good either, but they have already been factored in."
Credit ratings agency Moody's Investors Service on Tuesday warned Western European banks over their exposure to struggling Eastern European countries.
"This, coupled with the economic linkages between the two regions, suggests that the acute economic slowdown in eastern Europe will weigh heavily on the euro area," said analysts at Barclays Capital.
German Finance Minister Peer Steinbrueck reportedly said Tuesday that countries sharing the euro may be forced to bail out troubled members, including Ireland, which had its debt-rating slashed last month.
Traders meanwhile said that the yen appeared to be losing some of its safe-haven appeal after Japan's economy shrank at the fastest pace since 1974 in the fourth quarter, and its finance minister resigned after denying he was drunk at a Group of Seven meeting on the economic crisis.
"These are not strong yen-selling factors, but they certainly make players hesitate to buy the yen," said Yuji Saito, head of foreign exchange at Societe Generale.
The Bank of Japan kicked off a two-day monetary policy meeting as the country stumbles through an economic crisis that the government has described as the worst since World War II.
Dealers expect the central bank to leave its key interest rate unchanged at 0.1 percent as it seeks new tools to repair credit markets and rescue the Japanese economy from a deepening recession.
In London trading on Wednesday, the euro changed hands at 1.2568 dollars against 1.2585 dollars late on Tuesday, at 116.28 yen (116.31), 0.8904 pounds (0.8837) and 1.4763 Swiss francs (1.4717).
The dollar stood at 92.52 yen (92.39) and 1.1747 Swiss francs (1.1694).
The pound was at 1.4115 dollars (1.4238).
On the London Bullion Market, the price of gold rose to 969.45 dollars an ounce from 968 dollars on Tuesday.
