Italian 10-year yields climbed back above the key 7 percent, a level widely deemed unsustainable, and Spanish borrowing costs rose ahead of the launch of a new 10-year bond on Thursday.
And in a worrying sign of the crisis moving beyond Italy, the spread of French, Belgian, Austria the spread of French, Belgian and Austrian 10-year bond yields over German Bunds all hit the highest levels since the euro was launched in 1999, while the equivalent Dutch spread hit its widest since early 2009.
The market's optimism over the new technocrat-led governments in Greece and Italy proved short-lived as investors refocused on worries about the ability of European policymakers to contain the deepening debt crisis, which German Chancellor Angela Merkel called Europe's "toughest hour since World War Two." "The continuing deterioration in the euro zone credit markets suggests that authorities are unable to pacify the markets with their current efforts," said Boris Schlossberg, director of currency research at GFT in Jersey City.
"The euro/dollar looks ready to test support at $1.3500 as risk aversion flows accelerate." The euro fell 0.5 percent to $1.3553, having dropped to a session trough of $1.3510 on Reuters data and edging closer to a one-month low of $1.3481 set last week.
It lost 0.7 percent to 104.28 yen , after sliding as low as 103.95, the weakest since Oct. 10. It broke below its Ichimoku cloud base around 104.10 yen, and charts suggested a clean break below that level by Wednesday's close would open the door to more losses, according to technical analysts.
Adding to bearish sentiment, the German ZEW survey showed analyst and investor sentiment slumped in November, the ninth monthly decline in a row.DISORDERLY OUTCOME Lee Hardman, currency economist at BTMU expects the euro to fall to around $1.25 over the next six months, saying there was a risk the market would start to price in a "disorderly outcome" to the crisis.
"The ultimate outcome is still unclear -- whether the euro zone moves closer to fiscal integration or whether there is a more disorderly break-up."
Camilla Sutton, chief currency strategist at Scotia Capital in Toronto, recommends investors short the euro/dollar at $1.3550, with a target of 1.3250.
She said repatriation flows have temporarily supported the euro, but they will dry up, removing an important piece of support. "Near-term sentiment has turned back against the euro and it is unlikely that the next few sessions will bring a catalyst to reverse this shift," Sutton said.
Data from the Commodity Futures Trading Commission showed Monday speculators trimmed bets against the euro in the week to Nov. 8, suggesting diminishing scope for a short-covering rebound in the common currency.
The dollar slipped 0.2 percent to 76.96 yen , hovering around its 55-day moving average at 76.95 yen. It had earlier jumped to an intraday high of 77.51 yen on trading platform EBS.
Traders said investors would likely sell the dollar on rallies as the yen was well-placed to gain in a risk-averse environment despite the possibility of Japanese action to curb the yen's strength. For the latest updates PRESS CTR + D or visit Stock Market news Today
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