By Ian Chua and Antoni Slodkowski
SYDNEY/TOKYO (Reuters) - The euro jumped on Monday after the European Central Bank announced steps to ease tensions in the euro zone debt market, while the Group of Seven major industrial nations reaffirmed their vow to support financial market stability and growth.
But the dollar wallowed not far from its record low against the Swiss franc after Standard & Poor's downgrade of the U.S. credit rating last Friday, with dollar-funding pressure emerging.
Commodity currencies gained some respite after Asian stocks fell less than initially feared, but they remained under pressure as traders said they wanted to see how European markets react after the European central bank's statement.
The ECB said it would "actively implement" a bond buying programme, signaling it would buy Italian and Spanish bonds to halt financial market contagion.
Hoping to soothe market jitters following one of the worst routs since the aftermath of the collapse of Lehman Brothers in 2008, G7 finance leaders agreed to offer ample liquidity to stabilize markets if needed.
"The G7 statement mentions coordinated action and I think it will succeed in giving some support to the market for now," said Koji Fukaya, director of global foreign exchange research at Credit Suisse Securities in Tokyo.
Fukaya said that despite sharp falls overall the dollar was still holding up relatively steady and many investors awaited the Fed's meeting on Tuesday to trade the greenback more aggressively.
"They (the G7 leaders) are working against pretty bearish market sentiment generated over the last couple of weeks and culminating in the historic nature of the events over the weekend," said Greg Gibbs, strategist at RBS in Sydney.
The euro briefly climbed as high as $1.4432, up more than a cent from late New York levels on Friday and a long way from last week's lows around $1.4055.
Traders in Tokyo also said that as the Australian and New Zealand dollars struggled against the greenback investors scooped up the euro, encouraged by the stance of the ECB and G7. The common currency was up 0.6 percent at $1.4353.
Against the yen it edged up to 112.51 yen from New York's 112.16, before reversing direction to stand at 112.05. It weakened against the Swiss franc, falling to 1.0921 francs, but held above an all-time low around 1.0719 plumbed last Friday.
Both the franc and yen remained underpinned by safe-haven flows, keeping alive the threat of intervention by Swiss and Japanese authorities to weaken their currencies.
"We'll likely see intervention again should speculative moves push the yen up sharply. Japanese authorities probably would want to keep (the dollar) above 77.10 yen, the level where they initially stepped in to intervene (on Thursday)," said Yunosuke Ikeda, a senior forex strategist at Nomura Securities.
The dollar fell as low as 77.94 yen and touched a record low versus the Swiss franc under 0.7500. Over the past month it has shed 6 percent against the Swiss franc and about 4 percent against the yen.
The dollar was down 0.5 percent at 78.05 yen.
Underscoring lingering anxiety in the market, gold, another safe haven, hit a record high around $1,689 an ounce, while commodities tied to economic growth fell, with U.S. crude oil futures down 2.6 percent.
"There are few places you can obviously hide ... and the ones that you can hide in are doing very well. Gold is the beneficiary because there is no central bank to sell it," Gibbs added.
RISK AVERSION
The greenback stayed under pressure against a basket of major currencies, weighed down by S&P's downgrade of the United States by one notch to AA-plus from the top notch AAA level on concerns about growing budget deficits.
Compounding the dollar's woes, moves in dollar/yen forward contracts suggested a rise in demand for dollar funding. The bid rate on dollar/yen 1-month forwards was quoted at -5.06 forward points at one time on Monday morning, the widest dollar discount since December.
Investors also gave commodity currencies a wide berth, prompting further declines in the likes of the Australian dollar. The Aussie dipped to a four-month trough of $1.0375 before recouping most of its losses to trade down 0.2 percent at $1.0416.
"S&P's move can only add to the sense of risk aversion. The Aussie is looking increasingly vulnerable and heading toward and through parity in the short term," said Robert Rennie, chief currency strategist at Westpac Bank.
"But there are a number of firebreaks out there. What the ECB does at the open of the European bond market, what the Fed does tomorrow, those are going to be very significant."
The Federal Reserve holds a policy meeting on Tuesday and there is much talk it could discuss the possibility of yet another round of quantitative easing.
(Additional reporting by Chikafumi Hodo in Tokyo, Masayuki Kitano in Singapore and Adrian Bathgate in Wellington; Editing by Michael Watson)