THE Australian dollar could fall below US90? if Greece pulls out of the eurozone, the chief currency strategist at Commonwealth Bank has warned, as leaders from the G8 group of nations worked over the weekend to combat the region's financial turmoil.
The Australian dollar fell to US98.24? on Friday, its lowest level in nearly six months, after Moody's downgraded 16 Spanish banks, and Fitch Rating's reduced Greece's credit rating to CCC on fears anti-austerity parties would win the country's new elections.
Currency strategists say if Greece pulls out of the eurozone the Australian dollar may fall much further.
The benchmark S&P/ASX 200 Index last week had its worst five-day return since September, shedding 5.6 per cent.
The local sharemarket shed 110.9 points on Friday, or 2.67 per cent, to 4046.5, its biggest one-day loss since November.
Not helping the local market were rising concerns that the Chinese economy was slowing appreciably, and the big miners were among the stocks sold off most last week.
In the US the Dow Jones Industrial Average shed 73.1 points, to 12,369.4, and the S&P 500 Index lost 9.64 points, or 0.7 per cent, to 1295.22.
Some of Australia's biggest banks last week said 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 leave the eurozone after elections on June 17, and a possible flow-on to other countries, could trigger a big fall in the Australian dollar.
Richard Grace, the chief strategist at Commonwealth Bank, said the odds of Greece making a formal exit from the eurozone had risen "significantly" in recent weeks, and if anti-austerity parties formed government in Greece in June the Australian dollar would be likely to fall to US93.95?.
But if a formal date were then set for Greece to leave 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 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 Australian dollar dropping to US89.90?.
Mr Grace also said that the dollar could plummet to below US70? if his bank's "disaster scenario" came to fruition.
In that scenario Greece, Portugal, Ireland, Spain and Italy which 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 Australian dollar would probably eventually recover to US105?.
National Australia Bank senior currency strategist Emma Lawson said fears of contagion from a Greek fallout were by far the biggest concern.
"The pressures on these bigger countries represent a significant market risk," Ms Lawson said. "This is why the fact that Greece is only 3 per cent of the euro area misses the point it is the contagion that it [brings] about that is the far greater problem."