Renewed worries in the euro-zone over the weekend pulled the euro down to a record low against the Swiss franc, weakened risky assets such as Asian stocks and boosted safe haven investments like U.S. government debt and gold on Monday.
The euro came under renewed selling pressure after Fitch Ratings cut Greece's debt ratings by three notches on Friday, pushing the country deeper into junk, while rival Standard & Poor's cut its outlook for Italy to negative from stable on Saturday.
The stream of bad news coming out of the euro zone and the resultant weakening in U.S. stocks on Friday also took its toll on Asian stocks as waning investor appetite for risk, pushed the region's bourses into the red and sparking a rush into safe-haven assets like government debt.
Sustained foreign selling following U.S. stocks' fall and caution about the global economic backdrop is weighing, and this is likely to continue until June, said Bae Sung-young, a market analyst at Hyundai Securities, adding the market still had relatively firm support at its 120-day moving average of 2,060 points.
Japan's Nikkei <.N225> and Australia's benchmark index <.AXJO> fell more than 1 percent. Seoul shares <.KS11> were down nearly two percent, led by declines in shares of Hyundai Motor <005380.KS> and Kia Motors <000270.KS> as a strike at one of their suppliers disrupted production.
Outside Japan, MSCI's index of Asia Pacific shares was down 1.7 percent after posting four consecutive weeks of declines.
The rush toward safe-haven assets helped 10-year U.S. Treasury notes build on Friday's gains. It was yielding 3.12 percent, down from 3.15 percent on late Friday.
EURO WOES WORSEN
The single currency breached support near 1.24 against the Swiss franc and hit a record low of 1.2345 francs on trading platform EBS but later trimmed its losses to stand at 1.2360.
Against the dollar, the euro slipped to $1.4095, having triggered some stop-loss selling near $1.4100. Some traders said the potential for further long liquidation suggested the euro could dip below that level in the near term.
The euro's worries seem to be far from over. Considerable net long positions in the single currency and a deteriorating technical picture along with a slew of bad news from the region may spell more losses for the euro, with the $1.35 handle eyed in the near term.
The euro's fortunes have turned around dramatically after hitting a peak of near $1.4940 in early May as investors have since swung from cheering the ECB's rate hikes to worrying about the impact of rising interest rates on peripheral countries.
The prospect of ECB rate hikes is no longer sufficient reason to buy the single currency, and in fact it may become the case that rate hikes will be seen as EUR-negative should peripheral concerns intensify. Credit Agricole CIB strategists said in a daily note.
That sparked a safety bid toward the greenback with the dollar index <.DXY> - which measures its value against a basket of currencies - hovering near a six-week high of 76 hit last week and poised for more gains.
Still, chunky gains may be limited as the Fed nears the end of its quantitative easing program in June. Stocks, bonds, gold and the euro are expected to fall in the three months after the end of the $600 billion plan, according to a Reuters poll.
In the commodity markets, U.S. crude futures retreated further below $100 per barrel on expectations for lower oil demand from Europe as a volcanic eruption in Iceland threatens air travel.
Gold, which also benefited from the decreasing comfort with risky investments, extended gains to a two-week high.