THE Australian dollar could fall below US90? if Greece pulls out of the eurozone, the chief currency strategist at Commonwealth Bank warned as leaders from the G8 group of nations worked over the weekend to combat the region's financial turmoil.
The dollar fell to US98.24? on Friday, its lowest level in nearly six months, after Moody's downgraded 16 Spanish banks, and the Fitch Ratings agency reduced Greece's credit rating to CCC on fears that anti-austerity parties would win the country's new elections.
Currency strategists say if Greece pulls out of the eurozone the dollar could fall much further.
Last week the S&P/ASX200 suffered its worst five-day return since September, shedding 5.6 per cent in value. The local bourse shed 110.9 points on Friday, or 2.67 per cent, to 4046.5 points, its biggest one-day loss since November.
Not helping the local market were increasing concerns that the Chinese economy is slowing appreciably. The big miners were among the stocks sold off the most last week.
In the US the Dow Jones Industrial Average shed 73.1 points, to 12,369.4, and the S&P500 index losing 9.64 points, or 0.7 per cent, to 1295.22.
Some of Australia's biggest banks stated last week they had been forced to become more cautious on funding in recent weeks as fears of a financial meltdown in Europe effectively closed the region's money markets.
Fears that Greece could exit the eurozone after elections on June 17, and a possible flow-on to other countries, could trigger a big fall in the dollar.
Richard Grace, the chief strategist at the Commonwealth Bank, said the odds of Greece making a formal exit from the eurozone had tightened "significantly" in recent weeks, and if anti-austerity parties formed government in Greece next month the dollar would likely fall to US93.95?.
But if a formal date were then set for Greece to exit the eurozone, fears that other debt-stricken countries would follow could set off a string of events, including the US Federal Reserve undertaking a third round of quantitative easing and the Reserve Bank cutting rates by 100 basis points to 2.75 per cent, with Australian 10-year yields dropping to 2 per cent, and the dollar dropping to US89.90?.
Mr Grace also said that the dollar could plummet to below US70? if the bank's "disaster scenario" came to fruition.
Under that scenario Greece, Portugal, Ireland, Spain and Italy - which between them account for 32 per cent of the region's gross domestic product - would eventually leave the eurozone.
But if that did not occur, and Greece was the only country to exit the eurozone, the dollar would likely eventually recover to US105?.
A senior currency strategist from National Australia Bank, Emma Lawson, said fears of contagion from a Greek fall-out were by far the biggest concern.
"The pressures on these bigger countries represent a significant market risk," she said.
"This is why the fact that Greece is only about 3 per cent of the euro area misses the point it is the contagion that it [brings] about that is the far greater problem."