Dollar dives amid European trouble

THE Aussie dollar has fallen one US cent and the euro has hit a record two-year low against the US dollar amid renewed fears about the European government debt crisis.

THE Australian dollar has fallen one US cent and the euro has hit a record two-year low against the US dollar amid renewed fears about the European government debt crisis.

At 17.00 (AEST) on Monday, the local unit was trading at 103.12 US cents, down from 104.09 cents on Friday.

The euro went as low as 120.85 US cents on Monday, its lowest point since June 2010.

Over the weekend, Spanish bond yields soared past seven per cent, pushing the cost of borrowing for the Spanish government to a level which is considered too high to be sustainable.

CMC Markets foreign exchange dealer Tim Waterer said the rise has put traders on the defensive and sold risk assets like the Australian dollar and the euro.

Equities were also sold off, the Australian share market fell 1.7 per cent and most Asian markets lost over one per cent.

"Traders around the globe appear to be suffering an all too familiar 'anxiety attack' on fears that Spain is on course for a financial calamity, and this sentiment was played out on the ASX200," Mr Waterer said.

"Given the latest flare-up in Spanish yields and renewed alarm over the country's ability to service its debt, the euro looks to be living on borrowed time trading above 1.20 against the US dollar in light of what appears to be
further trouble down the road."

The HSBC purchasing managers index manufacturing data for July will be released on Tuesday, which Mr Waterer says could put more downward pressure on the Australian dollar.

"A poor result could exacerbate the selling of higher yielding currencies," he said.