Risk was shunned again in markets overnight, with the Euro taking a majority of the selling, though commodity currencies suffered as well. Concerns that the Euro-zone sovereign debt crisis will lead to considerable losses for the region's banks pushed the Euro to a fresh 4-year low, as it fell below the 1.2150 level against the greenback. The single currency had gotten some support in the recent weeks as the markets digested the implication of the $1 trillion EU-IMF stabilization bailout package and the news that the ECB was buying bonds on the market. However, the toll will still be very harsh on Euro-zone banks.

The ECB said that banks in the Euro-zone will suffer considerable losses this year and next, which could amount to an additional 195 billion in write-downs and weigh on bank's profitability. In other words, the sovereign debt crisis can spread to a banking crisis which will have significant negative consequences for the Euro, the monetary union and the global financial system.

If that wasn't enough to upset risk sentiment in currency markets, we also had some weaker than expected news from China. Two measures of Chinese manufacturing showed continued expansion in May, but at a slower pace, a sign that the governments recent efforts to reign in an overheating economy are having an effect.

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Following its dip to a low of 1.2110 the EUR/USD pair managed a rather strong correction, rising back avobe 1.22 in early NY trading.