The euro fell on Friday after the leader of the far-right party in Greece's coalition declined to back a bailout agreement, again raising concerns about the risk of a chaotic default and pushing market sentiment from optimism to pessimism.
The comments caused the euro to extend earlier losses after euro zone finance ministers sought further measures from Greece before signing off on a 130 billion euro bailout package.
Political parties in Athens struck a long-awaited deal on harsh austerity steps necessary for a second rescue on Thursday, and a debt swap deal with Greece's private bondholders is thought to be close.
But George Karatzaferis, head of the LAOS party, told a news conference on Friday he cannot vote for the loan agreement. While his party, with only 15 deputies in the 300-seat Greek parliament, will not prevent the agreement being passed, his comments soured the taste for risk appetitive from the earlier session.
Ministers from the LAOS party in Greece's coalition government have now offered their resignation to Prime Minister Lucas Papademos, the semi-official Athens News Agency (ANA) said on Friday.
It's not entirely surprising to see negative news overnight trigger a pretty sharp unwinding of risk, said Omer Esiner, chief market strategist at Commonwealth Foreign Exchange in Washington. A lot of the uncertainty that has hung over markets for the better part of last year remains largely in place. This is a dose of reality for people.
The euro lost 0.8 percent on the day to $1.3171, pulling well below a two-month high touched on Thursday, a level just short of its 100-day simple moving average, currently at $1.3328, using Reuters data.
The euro had seen strong gains since hitting a 17-month low in January as the market bet Greece would hammer out its second bailout deal with international lenders.
But Eurogroup chairman Jean-Claude Juncker said a further 325 million euros of spending cuts needed to be found and, with Greek elections looming, political assurances were needed that the plan would be implemented.
The Eurogroup includes the finance ministers of the countries in the euro zone.
Some of our clients remain concerned that the Greek situation could worsen from here. With some event risk still very much out there, people may not be willing to keep sizeable risky positions ahead of this weekend's Greek parliamentary vote, said Valentin Marinov, currency strategist at CitiFX
Traders also reported a large option expiry at $1.3300.
The Australian dollar was underperformed, pressured as the euro zone worries pushed equities lower as well as a dovish quarterly statement from the Australian central bank RBA and data showing a slump in Chinese imports.
The Aussie fell 1.2 percent to $1.0658, well below a six-month high reached earlier this week.
We see risk of potentially strong pullbacks on a three-month view given risk that the euro zone crisis could undermine risk appetite, but would view these as AUD/USD buying opportunities, said Rabobank in a note.
Against the yen, the euro was down around 0.8 percent on the day at 102.36 yen, off a two-month high hit on Thursday.
Meanwhile, the dollar rose to its highest against the yen in two weeks. It was last at 77.70 yen.
Japan Finance Minister Jun Azumi said the exchange rate remained out of sync with economic reality and repeated he was ready to counter excessive speculation.