The euro fell to its lowest in almost two weeks against the dollar on Monday and looked set to extend losses as investors doubted a European summit later in the week will find a solution to the region's escalating debt crisis.
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 percent at $1.2490. It lost 1.6 percent to 99.49 yen.
Support for euro/dollar was seen near the June 12 low around $1.2441 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) 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 percent early last week before easing.
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 2 percent 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.
Greece's new prime minister and finance minister will miss the meeting scheduled for Thursday and Friday, due to illness, which also delayed a visit to Athens by Greece's international lenders.
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.
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.
Cautious market sentiment helped the dollar index .DXY extend gains from last week to hit a near two-week high of 82.632. It was last up 0.3 percent at 82.502.
The dollar and the yen are usually the most sought-after currencies during financial market stress and economic uncertainty, although the yen's status as a safe-haven currency has been challenged amid concern over Japan's economic problems.
Morgan Stanley analysts put out a long dollar/yen trade recommendation given a consumption tax hike in Japan that looked set to be passed this week, which in the past has weakened the yen.
This could continue, particularly if the BoJ (Bank of Japan) eases in response to lower demand due to the tax rise. Over the longer term, we maintain our bullish yen view, but look for the dollar to be the best performer in the next few weeks, Morgan Stanley said in a note.
The bank recommended buying the dollar at 79.90 yen, targeting a move up to 84.90, with a stop loss order at 78.90. The dollar last traded down 0.9 percent at 79.66 yen.
Commodity currencies fell against the safe-haven U.S. dollar, extending last week's decline as commodity prices recoiled on the increasingly grim global growth outlook.
The Australian dollar dropped 0.6 percent to $0.9998, with good support expected at $0.9979, the 38.2 percent retracement of its June 1-20 rally. The New Zealand dollar dipped 0.4 percent to US$0.7856.