The euro hit a nine-year low against the yen on Tuesday as the loss of key technical support led speculators to short the currency in the hope of forcing stop-loss sales against both the yen and the dollar.
Falls in Japanese equities helped buoy the yen against the euro and broadly on crosses. There was also some talk of macro hedge-fund selling in the euro against the dollar.
Some stops can be seen in the euro starting from a little above 107.00 yen. If those are hit, things could get a bit nasty, said a trader for a major Japanese brokerage house.
The euro fell to as low as 107.21 yen on trading platform EBS, its lowest since November 2001. After trimming some losses, the euro last stood at 107.29 yen, down 0.5 percent on the day.
Against the dollar, the euro hit a six-week low of $1.2620 on EBS.
After trimming some of its losses, the euro stood at $1.2638, down 0.2 percent from late U.S. trade on Monday.
Bears were targeting $1.2605, the 50 percent retracement of the euro's rise from a four-year low of $1.1876 in June to its August peak of $1.3334. A break here would open the way to at least $1.2522 and then $1.2479, daily lows from July.
In the past few months, market players had overlooked problems in Europe, such as the sovereign debt crisis and the deteriorating health of some banks in the region, due to optimism that a steep fall in the euro earlier this year would help the euro zone economy through a boost in exports, traders said.
But market players have shifted their focus back to the euro zone's troubles after tame economic data and unexpectedly dovish comments from a top European Central Bank official.
The August euro zone purchasing managers index for manufacturing, which drove a large part of the economy's return to growth in the third quarter of last year, saw its pace of growth slowing, data showed on Monday.
Late last week, ECB Governing council member Axel Weber said the central bank should extend its loose monetary stance, stoking worries about the euro zone economy.
Players have plenty of factors to sell the euro on as underlying problems in the region have not been solved, said Shuichi Kanehira, head of FX spot trading at Mizuho Corporate Bank. The downward trend in the euro is set to stay.
YEN BROADLY HIGHER
The yen was broadly higher and edged back up toward a 15-year peak against the dollar hit earlier in August.
The greenback slipped 0.3 percent against the yen to 84.93 yen, falling back toward a 15-year low of 84.72 yen hit on EBS earlier this month.
The trader for a major Japanese brokerage house said there was talk of bids in the dollar at levels near 85.00 yen to 84.80 yen, but added that stop-loss offers were lurking underneath.
The low-yielding yen is a funding currency for carry trades and can rise in times of market stress or when equities slide and are seen as denting investor risk appetite.
A trader for a major Japanese bank said that the Nikkei's drop to a 15-month trough suggests that some Japanese investors will likely be cautious about taking on additional risk, such as conducting unhedged overseas investment.
I don't think they can move ... Their risk tolerance will not rise, the trader said.
With the yen having hit a nine-year peak against the euro and nearing a 15-year high against the dollar, traders were cautious about the potential for some kind of measures by Japanese authorities to stem the yen's rise.
A drop in the dollar toward 84.00 yen might prompt the BOJ to take monetary easing steps even before its next monetary policy meeting in early September, said a trader for a Japanese bank.
Japanese Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa discussed the yen and had agreed to work closely in a phone conversation held on Monday, but Kan did not ask the central bank to ease monetary policy further, and the two did not touch on currency intervention either.
Market players say the most likely response from Japanese authorities may be for the BOJ to increase the size or extend the duration of its three-month fixed rate fund supply operation.
But traders are skeptical that Japanese authorities would resort to yen-selling intervention unless the yen's rise picks up more speed.
(Additional reporting by Wayne Cole and Krishna Kumar in Sydney; Kaori Kaneko and Rika Otsuka in Tokyo; Editing by Joseph Radford)