The euro held near a 17-month low against the dollar and hit a 11-year low versus the yen on Monday on concern a Standard & Poor's downgrade of euro zone states and a Greek debt stand-off would aggravate the region's debt crisis.
As nine euro zone countries, including France, had their ratings cut, talks between Greece and private creditors on a debt swap deal broke down, raising the risk of a messy Greek default and dousing last week's glimmers of optimism.
"All the signals from S&P were that the crisis will get worse before it gets better and I struggle to find an argument for not being short of euro/dollar at the moment," said Niels Christensen, currency strategist at Nordea in Copenhagen.
"It is difficult to see that any event will ease fears about the euro zone debt crisis".
The euro was last down 0.1 percent against the dollar at $1.2671 and was vulnerable to a test of Friday's 17-month low of $1.2624, with stop loss orders said to be at $1.2600.
Analysts and traders said a lack of technical support meant a break below $1.25 could quickly see the euro falling towards $1.20 and the 2010 low around $1.1875.
With euro short positions at extreme levels, the single currency may gain some respite from investors taking profit on those positions. However, any such rallies were expected to be limited, with investors keen to put on fresh shorts.
"With the (S&P) downgrade having been well telegraphed and euro positioning beginning to look more clearly euro negative, the risk of a euro bounce after knee-jerk selling remains," a London-based trader said.
Possible support for the euro lies at its August 2010 low of $1.2588. Below that, trendline support connecting the July 2001 low, early 2002 troughs and its June 2010 low lies around $1.25.
The euro fell 0.2 percent to 97.35 yen, having earlier hit a fresh 11-year low of 97.04 yen on trading platform EBS, with traders citing euro selling by Japanese exporters.
Markets will scrutinise upcoming euro zone debt auctions for any sign of waning demand for peripheral euro zone debt, while there are concerns the bloc's EFSF bailout fund may also lose its triple-A rating with S&P.
The euro's drop against the yen prompted Japanese Finance Minister Jun Azumi to say he was worried about the euro's fall, adding currency moves had been "a little rapid".
Analysts at Citi played down the possibility of yen-selling intervention against the euro, saying the drop in the euro to levels below major Japanese manufacturers' currency assumptions of about 105 yen to 110 yen, may be less harmful for Japanese exporters than it might appear.
"Due to the economic slowdown in Europe, exports to Europe from Japan have been sluggish, suggesting that the magnitude of the currency impact may be somewhat smaller," Citi analysts Osamu Takashima and Issei Suzuki said in a research note.
With the euro in retreat, the dollar index reached a high of 81.702, within easy reach of a 16-month peak at 81.784 hit late last week.
The dollar, however, slipped 0.1 percent against the yen to 76.84 yen, with traders citing Japanese exporter selling.
Traders have said market wariness toward the possibility of yen-selling intervention may increase if the dollar were to threaten to breach 75.00 yen.
Against the Swiss franc, the euro was steady at 1.2079 francs, edging close to the Swiss National Bank's floor of 1.20 francs, though traders cited near-term support from an options barrier at 1.2050 francs.
With the euro on the defensive, some market players said it may be set to test the 1.20 level, particularly after chairman Philipp Hildebrand's resignation last week.