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.

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.

US Dollar is ready for monthly advance against the euro on speculation that manufacturing in the U.S. expanded for a fifth month and employers didn’t cut any jobs in December.

The yen was at a three-week low versus the euro on prospects the Bank of Japan will add to credit-easing measures to revive growth in the world’s second-largest economy.

A combination of higher U.S. yields and further signs of improvement in the labor situation in the U.S. should continue to underpin the dollar.  There is a stronger sense that 2009 was not as kind to the Japanese economy as it was to other parts of Asia.

The U.S. currency bought 92.39 yen at 6:04 a.m. in London from 92.44 yen in New York yesterday, when it reached 92.77 yen, the strongest level since Sept. 8. The dollar traded at $1.4370 per euro from $1.4339. The euro was at 132.76 yen from 132.54, after earlier touching 132.85 yen, the highest since Dec. 7.

The dollar has fallen this year against all of the 16 most- traded counterparts except for the yen as a global recovery eroded demand for the safety of the world’s reserve currency.

Meanwhile, the euro recovered most losses against the Swiss franc after tumbling to a nine-month low overnight when traders took advantage of thin liquidity to push it quickly through stops below 1.49 Swiss francs.

Gains in European and U.S. share markets .FTEU3 .SPX helped lift risk appetite and weighed on the safe-haven dollar, although analysts say the inverse relationship between stocks and the greenback has weakened recently.

“What we saw was some consolidation (in the dollar) overnight and that looks like it’s continuing into the U.S. session,” said Omer Esiner, senior market analyst at Travelex Global Business Payments in Washington.

“Keep in mind the dollar had a very impressive week last week, rising pretty much across the board, so it’s no surprise to see a little bit of consolidation,” he added.

In early trading, the euro was up 0.1 percent at $1.4358 EUR=,, but it stayed close to Friday’s low of $1.4262 on EBS, its weakest since Sept. 4.

The euro has fallen sharply from levels above $1.50 as recently as Dec. 4, pressured by concerns about the fiscal health of some countries on the euro zone periphery following recent rating agency downgrades on Greek debt.

The European Commission said on Monday the euro was overvalued and that its further appreciation could hit the more open economies in the euro zone. [ID:nBRQ009642]

The ICE Futures dollar index .DXY, which measures its performance against six other major currencies, dipped 0.2 percent to 77.657, though it was still not far from a more than three-month high of 78.141 hit on Friday.

Ahead of the year-end, the dollar has been supported as investors cut back on short dollar positions, though some traders said the U.S. currency’s gains could begin to slow as many of these positions have already been neutralized.

U.S. Commodity Futures Trading Commission data on Friday showed speculators cut bets against the dollar to their lowest in more than 10 months in the week ending Dec. 15. [IMM/FX]

Against the yen JPY=, the dollar traded at 90.70 yen, up 0.4 percent on the day.

FRANC RETREATS

The euro was steady at 1.4942 francs EURCHF=. It had earlier crashed through stops below 1.4900 francs to hit a nine-month low of 1.4826 on trading platform EBS.

Investors have been testing the resolve of the Swiss National Bank after it subtly altered its intervention stance earlier this month, saying it would act only to counter an “excessive” appreciation of the franc versus the euro.

But investors continued to worry about the chances of intervention. In earlier trade, the franc fell sharply against the dollar and the euro, with traders saying a large dollar/Swiss franc buy order by a commercial bank triggered unconfirmed talk of SNB action.

The SNB and Bank for International Settlements, which has acted for the SNB in the past, declined comment.

“Euro/Swiss has reached quite low levels and it could be an indication that the SNB is not targeting specific levels as such,” said Sverre Holbek, Danske Bank strategist in Copenhagen.

“This may allow the currency to slip a bit further than we’ve seen previously, but we still don’t think they are ready to abandon their intervention in the currency market just yet.”

The Australian dollar fell 0.7 percent against the U.S. dollar to $0.8852 AUD=, close to a 10-week low hit on Friday as market players continued to scale back expectations for how high Australian rates will rise next year.

The reaction to the Federal Reserve post meeting statement was somewhat limited, as the US central bank showed optimism towards an economy that is fast recovering.

The Federal Reserve also left the interest rate near zero and reinstated that the rate was going to be low for some more time. It said that it would let the special liquidity measures expire by the end of next year. The dollar has risen on year-end position that has added to gains for the month that were aggravated by slowing job losses in the US and improving consumer confidence in their economy.

The euro has come down to about 4 percent against the dollar during this month and is on track for its biggest one-month fall since January, hit a three-month low of $1.4356 further down more than 1 percent.

In this pre holiday liquidity, the euro has come down to the lowest level against the dollar since September. It picked up a pace at $1.45 affecting stop-loss sell orders taken below $1.44.

This is making euro zone countries much concerned about fiscal troubles as that in Greece, that suffered a downgrade of its credit rating in a week’s time. The dollar has also risen against the Swiss Franc hitting a three month high of 77.70 against six major currencies and a two month high agaist Australian dollar.

Asian shares have come down too.The MSCI index of Asia pacific is 1 percent to below 40 percent. The regional gauge has gained more than 62 percent this year, rising to double the pace of its global counterpart.

The Nikkei share average in Japan dipped 0.1 percent, slipping from sevenweek highs hit earlier in the day, as investors pocketed profits from a rally in big banks likeMitsubishi UFJ Financial Group. The banks had surged the previous day when sources said that global banking regulators were considering an effective delay to the implementation of new rules.

The price of oil scame down one percent to below $72 a barrel, and gold prices dipped more than one percent to $1,125 per ounce, with the firm dollar weighing on the demand. A stronger dollar makes gold an alternative asset and makes dollar-priced commodities like oil more expensive for holders of other currencies.

Speculation was widespread that investors were rushing to pay off bank loans and acted on people’s sentiments too. U.S. Treasury securities have also risen supported by softer stock markets.

The benchmark 10-year Treasury note rose to yield 3.573 percent, down about 3 basis points from late U.S. trading on Wednesday.