The euro fell on Tuesday towards a four-year low against the dollar, hurt by fears that the region's sovereign debt problems may spread to the banking system, while the Australian dollar dropped after weak building data.
Approvals for building new Australian homes dived in April, backing bets the Reserve Bank of Australia (RBA) would not raise interest rates anytime soon.
The central bank is announcing its rate decision at 0430 GMT and it expected to keep rates on hold at 4.5 percent.
But investors are waiting to hear its assessment of the balance of risks, given the euro-area debt crisis has become a far more destabilising factor to global growth than earlier thought.
"Investors are watching whether the RBA becomes more dovish," said Tsutomu Soma, senior manager of the foreign asset department at Okasan Securities.
"The RBA is drawing lots of attention as Australia is the only place investors feel really comfortable about putting their money as Europe has its debt crisis and as there are signs of economic bubbles in some emerging countries."
Any hint that the central bank may hold interest rates steady for the coming months could prompt investors to further trim risk assets, hurting the Australian dollar and other higher-yielding currencies, traders said.
The European Central Bank on Monday warned that euro zone banks faced up to 195 billion euros in a "second wave" of potential loan losses over the next 18 months due to the financial crisis, and said it had increased purchases of euro-zone government bonds.
"Over the next 18 months calm water could turn turbulent in the blink of an eye," RBC Capital senior currency analyst David Watt wrote in a note. "Accordingly, euro rallies seem likely to remain rather shallow and in that regard it is struggling to maintain the $1.23 handle."
The euro was down 0.4 percent at $1.2263, hovering above a four-year low of $1.2143 struck on May 19. Near-term support is seen around $1.2140, the 50 percent Fibonacci retracement of the currency's 2000-08 advance.
Traders said investors were looking at every bounce in the single currency to sell. Against the yen, the euro fell 0.3 percent to 111.73 yen.
Speculators and funds have gone short on the euro in droves in recent months with the latest data from the Commodity Futures Trading Commission suggesting they were still wary of cutting those positions.
The dollar inched down 0.2 percent against the yen to 91.08 yen.
But the dollar index edged up 0.2 percent to 86.72, supported by safe-haven inflows amid growing worries about the sustainability of a global recovery.
Underlining those economic risks, China warned on Monday that global growth remained vulnerable to sovereign debt risks and the possibility of a second downturn.
Data showed on Tuesday China's official purchasing managers' index (PMI) fell to 53.9 in May from 55.7 in April. The reading was in line with the median forecast and marked the 15th straight month that the PMI has stood above the threshold of 50 that demarcates expansion from contraction.
The Australian dollar slid 0.7 percent to $0.8398. Against the yen, the Australian dollar dropped 1 percent to 76.47 yen.
Cross/yen was hit after news that Argentina extended the deadline for its debt swap by two weeks on Monday, hurting sentiment towards emerging economies.
