The euro hit a seven-month low against the dollar on Thursday as concerns intensified that Greece's fiscal problems would spread to other highly-indebted euro zone countries, while European stocks followed Asia lower.
Investors are looking to monetary policy decisions by the Bank of England and the European Central Bank. The BoE looks set to halt its government bond buying programme, taking the first step toward normalizing policy, but both of them are expected to emphasize that interest rates would stay low for some time.
The premium investors demand to hold government debt issued by peripheral countries such as Greece, Portugal and Spain rather than benchmark German bunds rose again. The cost of insuring Portuguese debt against default hit a record high.
The euro zone is dealing with a most severe debt crisis and the European Union said Greek plans to cut the budget gap from 12.7 percent of gross domestic product in 2009 to below 3 percent in 2012 would not be easy to implement.
Investors are waiting for ECB President Jean-Claude Trichet, who is due to speak at 1330 GMT (8:30 a.m. EST).
The market will be closely watching any comments Trichet has to make on the fiscal situation in the euro zone which could lead to volatility in the currency. said Lauren Rosborough, currency analyst at Westpac.
The euro fell around 0.4 percent on the day to $1.3831, its lowest since early July.
The 10-year Portuguese/German government bond yield spread widened nine basis points on the day to 154 basis points. The equivalent Greek spread widened 12 basis points to 360 bps while the Spanish spread edged out to 93 bps from 91 bps.
Portugal added to investor jitters on Wednesday after it cut its planned T-bill placement because yields spiked from January's placement on Greek concerns.
Portuguese five-year credit default swaps hit a record high of 216 basis points from 196.2 bps late on Wednesday. This means it costs 216,000 euros per 10 million euros of exposure. Greek and Spanish five-year CDS also rose.
This highlights how the issue of fiscal problems in EMU is spreading and will continue to provide a negative backdrop for the euro, BNP Paribas said in a note to clients.
Renewed pressure on spreads in EMU will keep euro/dollar under pressure and the prospect of a break to new lows has increased. MSCI world equity index fell 0.4 percent while the FTSEurofirst 300 index lost 0.3 percent. Shell fell more than 2 percent after it posted a 75 percent fall in fourth-quarter profits to $1.18 billion due to falling output.
Japanese stocks fell 0.5 percent with Toyota Motor sliding further on its recall woes.
Emerging stocks dropped 0.8 percent.
U.S. crude oil fell 0.6 percent to $76.53.
The bund futures were steady.
The dollar rose a quarter percent against a basket of major currencies.
(Editing by Toby Chopra)