Downward spiral accelarated after Standard and Poor’s  downgraded Greece’s government debt to junk status and sliced Portugal’s ratings by two levels.

The downgrades fueled worries that a sovereign debt problem could spread to other areas of Europe, prompting Asian short-term players to sell the common unit and triggering stop-loss selling-orders, dealers said.

In early Asian trading, the European single unit fell to $1.3144, its lowest level since April 29, 2009. Against the yen, the currency dropped to Y122.37, its weakest since March 25.

S&P’s downgrade was a surprise. Although some sort of optimism had emerged toward a possible bailout for Greece late last week, market sentiment has now worsened.

As of 0130 GMT, the euro stood at $1.3186 compared with its New York overnight level of $1.3189. Against the yen, the currency exchanged hands at Y122.82 compared with Y122.83.

The U.K. pound was at Y142.11 and $1.5260, from Y142.14 and $1.5253 respectively late Tuesday. The Australian dollar was at Y85.55 from Y85.23. The New Zealand dollar stood at Y66.33 from Y66.22.

Asian currencies opened lower Wednesday, as traders said jitters on Greece’s downgrade should lead to consolidation moves and profit-taking after recent rallies drove the likes of the Korean won and the Singapore dollar to multi-month highs just days ago.

Against the won, the U.S. dollar soared to a two-week high of KRW1,123 from KRW1,110 late Tuesday. The dollar also rose to a one-week high of MYR3.2180 against the Malaysian ringgit, Asia’s best performing currency so far this year, from MYR3.1850 late Tuesday.

We would expect most emerging market assets and currencies to remain under pressure in the short term at least, all the more since emerging markets have welcomed large capital inflows over the past few weeks.  Still, we remain positive on Asian currencies on economic fundamentals in the longer-term, and it could be the case that in any risk-deleveraging trade Asian currencies outperform other emerging market assets.

The euro may fall to $1.3130 and Y122.00 in the Asian session as regional shares were sharply lower after the Dow Jones Industrial Average closed down 1.9% overnight, dealers said.

Japan’s Nikkei 225 was down 2.8%, Australia’s S&P/ASX 200 was off 1.6% at 4,800 and South Korea’s Kospi Composite was down 1.7%.

With the euro already weakening, “speculators may throw fuel on the fire,” which could accelerate euro-selling, said Motonari Ogawa, a senior dealer at Barclays Capital.

In the near term, the euro may extend its losses to $1.3000 and $120.00 if any negative news about Greek debt issues emerges, reinforcing the view that the euro-zone debt problem may persist for a while, traders said.

Meanwhile, the dollar stood at Y93.13 as of 0130 GMT compared with Y93.12 in New York late Tuesday. The dollar may fall to Y92.70 if share markets stagnate, dealers said. But a further decline will likely be limited as players refrained from more active trading ahead of the outcome of the two-day meeting of the Federal Open Market Committee due later in the day.

As key Chinese economist cautioned that appreciation of local currency will drive exporters out of business, China’s yuan slid lower against the U.S. dollar late Friday afternoon due to the U.S. unit’s strength against other major currencies during Asian trading hours.

Comments by Chinese bankers today underscores the domestic political pressures on Beijing amid growing international calls for China to let the yuan rise.

Vice Commerce Minister Zhong Shan told Wall Street Journal Thursday ahead of a visit to the U.S., said that the profit margin on many Chinese export goods was less than 2%.

On the over-the-counter market, the dollar was at CNY6.8265 around 0930 GMT, up from Thursday's close of CNY6.8261. It traded between CNY6.8258 and CNY6.8267, Dow Jones reported.

The ICE Dollar Index, which tracks the U.S. currency against a trade-weighted basket of currencies, rose to 80.429 at 0930 GMT from 80.272 late Thursday in New York.

However, the dollar's gains in China's onshore market were capped by the steady central parity. The dollar-yuan central parity was set at 6.8263, almost unchanged from 6.8262 Thursday.

“The market is quiet today, as the strength in the overnight dollar only pushed the central parity higher by one point,” said a Shanghai-based foreign bank trader.

Traders said they expect the dollar to climb in the onshore market as dollar demand is likely to increase because of import payments at month-end.

Offshore, one-year dollar-yuan nondeliverable forwards were at 6.6601/6.6641, down from 6.6650/6.6700 late Thursday.

Mr. Zhong talked about a potential tipping-point effect to describe the fragile situation of many exporters. “Water doesn’t boil if it is heated to 99 degree Celsius. But it will boil if it is heated by one more degree,” he said. Likewise, “a further rise in the yuan by a very small magnitude might cause fundamental changes” to exporters in China, he said.

The yuan climbed 21% against the dollar from 2005 to 2008, when China adopted a managed-float currency system under which the yuan’s value was linked to a basket of currencies. But the yuan has been kept almost unchanged against the dollar since the outbreak of the global crisis to help Chinese exporters, which has prompted much criticism from abroad.

 The Obama administration’s proposed banking regulations and the delay in the Senate’s vote to reconfirm Ben Bernanke as Federal Reserve chairman capped a week of negative news for riskier assets, after revived concerns over Greece’s sovereign debt and speculation that China will take further steps to tighten monetary policy triggered the flight to safe-haven assets.

“We’re ending the week in a sour and uncertain note,”  Richard Franulovich, senior currency strategist at Westpac Banking Corp. in New York told Dow Jones.

In that environment, assets and currencies viewed as safest, particularly the yen, benefits, he said. The dollar dipped at one point to Y89.78, the lowest since Dec. 18, while the euro sank to a nearly nine-month low of Y126.55.

Late Friday afternoon in New York, the euro was at $1.4138 from $1.4097 late Thursday, according to EBS via CQG. The dollar was at Y89.92 from Y90.33, while the euro was at Y127.10 from Y127.27. The U.K. pound was at $1.6100 from $1.6115. The dollar was at CHF1.0415 from CHF1.0426. The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 78.280 from 78.395. As a result, Deutsche Bank’s PowerShares US Dollar Index Bearish (UDN) exchange-traded fund was up 0.22% from late Thursday, while its PowerShares US Dollar Index Bullish (UUP) was down 0.17%. The two exchange-traded funds are based on Deutsche Bank currency futures indexes, whose composition mirrors that of ICE’s Dollar Index.

The euro gained against the dollar, even though it faces its own problems over sovereign-debt worries in Greece.

Because of those debt worries, the euro’s gains are likely to be limited, said Jacob Oubina, currency strategist at Forex.com in Bedminster, N.J. “Europe is riddled with all kinds of debt problems, but the U.S. dollar” is under pressure of its own “from the draconian Obama proposals,” Oubina said.

After China reported that its economy expanded at a faster pace in the fourth quarter of last year, investors fretted that China would take additional steps to tighten monetary policy, including raising the amount of deposits banks must keep on reserve as well as boosting the yield on three-month bills that it sells to financial institutions.

 ”I think the bottom line here is it’s thrown the health of the recovery into a state of flux,” said Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Conn.

The commodity-backed Canadian currency fell on the dollar after Canadian retail sales decreased 0.3% in November from October–the first drop in four months.

Meanwhile, investors were keeping an eye on the Swiss franc after Swiss National Bank President Philipp Hildebrand reiterated Friday in an interview with The Wall Street Journal that the SNB would fight any “excessive” appreciation of the Swiss currency.

With the euro-zone struggling with fiscal problems on its periphery, most acutely in Greece, the franc has faced more upward pressure recently because it is seen as a “flight-to-quality” currency.

Economic data showing a U.S. consumer still under stress, continuing concern over sovereign debt in the euro zone and a possible further tightening of Chinese fiscal policy all worked together to lead investors to the safe-haven dollar and yen.

“Every major region has its own bad story that seems to be coming back into play,” said Brian Dolan, chief currency strategist at Forex.com in Bedminster, N.J.

Late Friday in New York, the euro was at $1.4376 from $1.4504 late Thursday, according to EBS via CQG. The dollar was at Y90.82 from Y91.09, while the euro was at Y130.54 from Y131.93. The U.K. pound was at $1.6255 from $1.6335. The dollar was at CHF1.0269 from CHF1.0182.

The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 77.222 from 76.729.

As a result, Deutsche Bank’s PowerShares US Dollar Index Bearish (UDN) exchange-traded fund was trading down 0.68% from late Thursday, while its PowerShares US Dollar Index Bullish (UUP) was up 0.57%. The two exchange-traded funds are based on Deutsche Bank currency futures indexes, whose composition mirrors that of ICE’s Dollar Index.

The euro was among the worst-performing major currencies, slipping more than 0.85% against the dollar and nearly 1.25% against the yen by late Friday.

Continuing concerns over Greece, which is struggling with large deficits and doubts over its sovereign creditworthiness, also weighed on the euro.

European Central Bank President Jean-Claude Trichet said after Thursday’s rate-setting meeting the central bank wouldn’t offer any euro zone member “special treatment,” and said Greece would not be exempt from collateral requirements.

“Fiscal factors have weighed on the euro when those things have been hitting the headlines,” said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.

Adding to investors’ flight from riskier assets was concern over the U.S. consumer, heightened by the release of J.P. Morgan’s fourth-quarter earnings, which noted losses in its card services, consumer lending and retail financial services segments.

J.P. Morgan Chief Executive James Dimon expressed a cautious outlook, noting that “consumer-credit costs remain high, and weak employment and home prices persist.”

Survey data released Friday showed the U.S. consumer–considered key to an economic turnaround–remained stressed. The University of Michigan/Reuters consumer sentiment index’s preliminary reading for January edged up to only 72.8 from the final December reading of 72.5. Economists had expected sentiment to improve to 74.0.

Currencies reacted little to other U.S. economic data released Friday, including the seasonally adjusted consumer price index, which increased slightly, in line with expectations. Industrial production also registered an uptick, in line with what economists had forecast.

“The numbers that were out [Friday], particularly the consumer confidence data, were not great,” sparking some concerns over the pace of the U.S. recovery, said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, N.J.

Speculation over whether China would further tighten fiscal policy to put the brakes on growth, fueled by data that showed rising bank lending, also led investors away from risk-positive currencies. The yen benefited most from the flight to safety.

Chinese financial institutions extended almost double the amount of new yuan loans in 2009 compared to a year earlier, according data issued Friday on the People’s Bank of China’s Web site.

Earlier this week, in a small step toward tightening, China’s central bank raised its yuan reserve requirement ratio by half a percentage point in a bid to stave off inflation.

If China puts a brake on its economy, and if global growth generally slows, the commodity-backed currencies of Australia, Canada and New Zealand could suffer. All were down against the U.S. dollar Friday.

Growth-sensitive assets including oil, gold and other metal prices slumped. The Australian dollar led the decline in the commodity-backed dollar bloc, dropping nearly 0.9% against the U.S. dollar.

But the greenback rose against other higher-yielding currencies, benefiting from the flight from risk triggered by monetary tightening in China and the stock market’s weakness on disappointing earnings reports.

“It’s all about risk aversion,” said Camilla Sutton, a currency strategist at Scotial Capital in Toronto.

The Japanese currency also advanced sharply against the euro, pushing Europe’s common currency to a session low at Y131.64, its lowest level since Jan. 5. The dollar dipped to a session low of Y90.73, its lowest level since Dec. 21.

Tuesday afternoon in New York, the dollar was at Y90.95, down from Y92.06 late Monday, while the euro was at Y131.73, down from Y133.78, according to EBS via CQG.

The euro was at $1.4489, down from $1.4524 late Monday.

The U.K. pound was at $1.6165, up from $1.6112.

The dollar was at CHF1.0185, up from CHF1.0157. The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 77.011, up from 76.983. As a result, Deutsche Bank’s PowerShares US Dollar Index Bearish (UDN) exchange-traded fund was trading down 0.02% from late Monday, while its PowerShares US Dollar Index Bullish (UUP) was unchanged from a day ago.

The two exchange-traded funds are based on Deutsche Bank currency futures indexes, whose composition mirrors that of ICE’s Dollar Index.

For most of 2009, the dollar weakened against the yen, hitting a 14-year low of Y84.82 in late November, as near-zero interest rates in the U.S. prompted investors to borrow cheap dollars to fund purchases of higher-yielding currencies, a role traditionally played by the yen.

The dollar rallied against the yen through December and early this year, but has retreated since Friday as short-dated Treasury yields, the most sensitive to official rate changes, have fallen.

Friday’s disappointing U.S. jobs report suggested that the Fed will remain on hold for a while, triggering renewed weakness in the greenback.

Around 10:54 a.m. EST (1554 GMT), lightly traded but nearby January gold is $20 higher at $1,158.20 an ounce on the Comex division of the New York Mercantile Exchange, while most-active February climbed $20.10 to $1,159 and peaked overnight at $1,163, its most muscular level since Dec. 8.

“It’s about the dollar and the very strong Chinese trade data,” said Frank Lesh, broker and futures analyst with FuturePath Trading.

The euro has been as high as $1.4558 against the dollar, its strongest level since Dec. 16 and up more than 1 cent compared to $1.4414 late Friday. Investors often buy gold as a hedge against dollar weakness. Furthermore, a softer greenback makes all dollar-denominated commodities cheaper in other currencies and thus can help demand.

The dollar remains undercut by a softer-than-forecast U.S. jobs report Friday.

“We have dollar weakness because the employment data pushed any thoughts of any [Federal Reserve] rate hikes out further,” Lesh said. “So we lost some dollar support and that, of course, is supportive for gold.”

Currency analysts also said a 17.7% rise in Chinese exports last month added to the pressure on the dollar.

“We also had very strong Chinese import data,” Lesh said. “That shows, as of right now, the appetite for commodities remains pretty strong.”

China’s imports rose nearly 56% last month. This improved demand picture has helped a number of commodities, Lesh continued.

Gold took off at “warp speed” as soon as overnight screen trading began late Sunday, said Jon Nadler, senior analyst with Kitco Metals. The report showing what he termed a “commodities shopping spree” in China triggered a return of risk appetite.

The overnight surge in gold was accelerated by buy stops, or pre-placed orders triggered when certain chart points are hit, said Matthias Detremmerie, founder and precious metals analyst at Goldessential.com. In fact, he said, when electronic trading opened Sunday night, it took only seconds for the market to break above Friday’s high of $1,140 in February gold and more buy stops were hit around $1,143.50.

Short covering was triggered, in which traders buy to exit positions in which they previously sold, Detremmerie continued.

Most-active March silver is up 32 cents to $18.79 an ounce and hit a high of $18.925 that was its strongest level since Dec. 4.

Meanwhile, April platinum is up $24.90 to $1,595.50 an ounce and hit a life-of-contract high of $1,596.20, while March palladium is up $5.85 to $431.

Federal Reseves comments that the US interest rates may remain low for “quite some time,” also hurt the dollar today.

Positive global economic data point to a continuing recovery, which is benefiting the euro and commodity-backed and emerging-market currencies, and persistent troubles in the U.S. labor market weigh on the dollar.

The lagging U.S. jobs report is “mostly perceived as a dollar issue and not as a broad risk event,” especially when Chinese data reported overnight points to a strong recovery there, Sebastien Galy, currency strategist at BNP Paribas in New York told Dow Jones.

Monday morning in New York, the euro was at $1.4525 from $1.4414 late Friday, according to EBS via CQG. The dollar was at Y92.47 from Y92.59, while the euro was at Y134.33 from Y133.48. The U.K. pound was at $1.6158 from $1.6034. The dollar was at CHF1.0163 from CHF1.0237.

The Indian rupee also rose to its highest level in more than 15 months against the U.S. dollar, benefiting from the greenback’s global weakness and hopes of capital inflows into the strongly growing Indian economy.

The dollar was at INR45.34 late Monday after falling to INR45.28, last seen on Sept. 22, 2008. It was down from INR45.76 Friday.

“The rupee has rallied quite a bit. Technically, there should be a correction, but it would only be mild,” said the foreign exchange trading head at a large private bank.

The local currency has risen more than 6% since October as a strengthening economy and relatively higher interest rates lure foreign investors back. Foreign funds bought more than $17 billion of local shares in 2009 after having sold more than $13 billion of shares the year before.

 A slew of initial share sales lined up mostly in February are likely to provide further strength to the local currency, the dealer added.

In response to questions at a meeting of the American Economic Association, Bernanke said the strategy “includes both raising the interest rate that we pay on reserves, plus a number of measures that we have been testing that will allow us to drain reserves from the system.”

The Fed last week proposed selling interest-bearing term deposits to banks, a move that would help drain the extraordinary amount of money pumped into the economy once the central bank decides to tighten policy.

The Fed is also testing another tool, reverse repurchase agreements, in which the central bank sells securities from its portfolio with an agreement to buy them back later. Under the arrangement, the buyers move cash from banks to the Fed, removing reserves from the system.

Bernanke’s remarks came right after Fed Vice Chairman Donald Kohn said the central bank will need to be ahead of the curve in withdrawing stimulus as the economy gradually improves.

Kohn also cited the Fed’s ability to pay interest rates on bank reserves, along with temporary actions the Fed can use to move securities off its balance sheet as key tools.

Turning to other issues, Bernanke said the U.S. dollar remains the world’s dominant reserve currency and that’s why it strengthens when economic conditions become more worrisome.

“People still view the U.S. dollar as a safe haven currency and U.S. markets as being the deepest and most liquid markets in the world,” Bernanke said.

After weakening considerably in 2009, the dollar rallied at the end of last year on expectations the Fed may begin to raise interest rates from their current record lows, meaning the currency will yield investors more.

Dollar is weak because there is not much happening – lack of fresh positive U.S. economic data, a factor that has been a major driver of recent dollar strength. Traders are trimming some of their recent bets ahead of year-end.

On the other hand the Swiss franc is strong today against its major opponents after the release of the Swiss UBS consumption indicator report for November at 2:00 am ET Tuesday in Europe. The franc thus topped a 3-week high against the yes, 2-week high against the dollar and a new multi-month high against the euro. At the same time, the franc recovered from an early Asian session’s 5-day low against the pound.

The UBS consumption indicator for Switzerland rose to 1.28 in November from 0.88 in October, the UBS bank reported. This was the highest level since September 2008, but it remained below its long-term average of 1.5. The consumption indicator in October was revised from 0.87 reported initially.

The Swiss franc that fell to 1.0369 against the US dollar at 10:20 pm ET Monday bounced back thereafter. Currently, the franc is trading at a 2-week high of 1.0313 per dollar with 1.020 seen as the next target level. At yesterday’s close, USD/CHF pair was quoted at 1.0349.

During early deals on Tuesday, the Swiss franc gained against the Japanese yes. As of now, CHF/JPY pair is worth 89.01 and this set the highest point for the Swiss currency since December04. If the franc advances further, it may target the 89.2 level. The pair closed yesterday’s trading at 88.59.

The Swiss franc that closed yesterday’s trading at 1.4882 against the euro jumped to a new multi-month high of 1.4868 in early deals on Tuesday. The next upside target level for the franc is seen at 1.480.

At 2:30 am ET Tuesday, the Swiss franc reached 1.6527 against the pound, up from early Asian session’s 5-day low of 1.6590. If the franc climbs further, it may target the 1.647 level. GBP/CHF pair closed yesterday’s deals at 1.6563.