NEW YORK (Reuters) - Fear that a euro-zone debt crisis may spread beyond Greece knocked the euro below the $1.29 level for the first time in more than a year on Wednesday and rattled bond markets in Portugal and Spain as anxious investors snapped up U.S. dollars.
The euro dropped as low as $1.2805 earlier in the session, its weakest since March 2009, after German Chancellor Angela Merkel warned the debt crisis could spread in Europe if a 110 billion euro ($146.5 billion) Greece rescue plan does not succeed.
"We're at a fork in the road," Merkel told German lawmakers. "This is about nothing less than the future of Europe, and with it the future of Germany in Europe.
In late afternoon trade in New York, the euro was down 1.2 percent at $1.2820. Over the last three days, it has lost more than 3.0 percent against the dollar, its worst performance since shedding 3.9 percent over a similar period in January 2009.
The euro briefly pared losses versus the dollar after the German parliament's budget committee approved a draft law on Germany's contribution to a financial aid package for Greece.
Alan Ruskin, head of currency strategy at RBS Global Banking & Markets, flagged $1.2330 and $1.1650 as key targets for the euro. He said if Greece defaults or restructures its debt, the single currency could trade as low as $1.10-$1.15.
The euro fell 2.3 percent to 119.96 yen and hit its lowest level against sterling since August. The dollar slid 1.0 percent to 93.68 yen but rose sharply against nearly all other currencies, hitting one-year highs earlier against the Swiss franc and a basket of currencies .DXY.
Sterling declined to a five-week low against the dollar at $1.5068 ahead of Britain's parliamentary election on Thursday, with two polls pointing to a "hung parliament," but the currency regrouped to $1.5098, little changed from late Tuesday.
EYES ON IBERIA
Anxious investors sold European stocks and drove up the cost of insuring Greek, Spanish and Portuguese debt against default, while taking refuge in the dollar.
Moody's put Portugal's credit rating on review for a possible downgrade on Wednesday.
"Contagion fears are driving the market and add to pressure on the euro, as does the ongoing civil unrest in Greece that may make it hard to institute reforms," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
The protests in Greece turned violent, and three people were killed in Athens when demonstrators set fire to a bank to protest planned tax increases and cuts to wages and pensions.
US ECONOMY ON THE MEND?
The dollar got a boost also from data showing U.S. private sector employers added 32,000 jobs last month, bolstering the view that U.S. interest rates will likely rise from record lows well before action on rates in the euro zone. Investors also looked ahead to the government's key monthly report on non-farm payrolls, due Friday.
"The dollar is the safe haven of first choice." said BNY Mellon currency strategist Michael Woolfolk. "This is a market that is looking for any excuse to sell the euro. Good news out of the U.S. or bad news out of Europe, take your pick."