LONDON—The dollar was in demand Wednesday as investors worried about the next installment of the euro-zone debt crisis fled currencies and markets deemed as relatively risky and sought refuge in the greenback and German bunds.
The pound was a notable decliner after the Bank of England raised the prospects of renewed quantitative easing by cutting its U.K. economic growth forecast.
The euro plunged to four-month lows against the dollar at the start of European trading to trade at $1.2681 and sank to a 3½ year low against sterling, trading as low as £0.7950. The Australian dollar was also under pressure, slipping to its weakest level against the dollar since December, to trade as low as $0.9870.
Elsewhere, yields on Italian and Spanish government bonds surged and the cost of insuring against a Spanish default hit a record high, while European stock markets sank.
The selloff then leveled off before the results of a German 10-year government debt auction as traders reversed their bets, although investor sentiment remained jittery as rumors swirled the market.
"We are entering a very dangerous phase," said Derek Halpenny, a currency strategist at the Bank of Tokyo Mitsubishi-UFJ in London. "Greece is still in the euro zone and...we are seeing contagion starting to spread already."
At the auction, Germany sold €4.107 billion of a 1.75% July 2022 bund at an average yield of 1.47%, the lowest on record for 10-year German debt.
"Demand was decent...and flight-to-quality flows have also been supportive," said brokerage firm Newedge in a note.
Meanwhile, consumer prices in the 17 countries that share the euro fell in April compared with a year earlier, in line with expectations, and showed a 0.5% rise from March and a 2.6% rise on the year.
The BOE's inflation report reversed sterling's recent strong run as the central bank suggested that inflation will take longer to return to target than previously thought and cut the country's growth forecast to 2.6% from 3%. Traders sold the pound against the euro fearing extra stimulus measures from the BOE.
The pound plunged to $1.5888 from $1.5987 before the report while the euro bounced off the 3½ year low hit in earlier trade, toward the £0.80 mark.
Emerging-market currencies swooned, with the Indian rupee sliding to record lows. The authorities in Indonesia and South Korea were suspected of intervening to support their currencies, while traders were reportedly nervous of similar action in Thailand, Malaysia and India.
The greenback traded at a four-month high against the Russian ruble at 31.14 rubles and against the Turkish lira at 1.8334 lira, while it hit a five-month high against the South African rand at 8.3922 rand.
The minutes of the Federal Open Market Committee are still to come at 6 p.m. GMT, and developments from Greece will be closely watched.
Midmorning in Europe, the euro was trading at $1.2713 from $1.2730 late Tuesday in New York.
The dollar was trading at ¥80.39 compared with ¥80.18 late Tuesday and at 0.9445 Swiss francs from 0.9435 francs. The pound was trading at $1.5924 from $1.5996.
The ICE Dollar Index, which tracks the greenback against a basket of currencies, was at 81.04 compared with 81.253.
