Concern that Europe will fail to resolve its debt crisis any time soon pushed the euro and stocks on both sides of the Atlantic lower, while fuelling appetite for US Treasuries.
Data showing that Germany's economy contracted in the latest quarter and Fitch Ratings' warning that the European Central Bank should up its game to prevent a collapse of the euro underpinned concern about the region's outlook.
The euro fell 0.7 per cent to US$1.2688 in midday trading in New York, after earlier hitting US$1.2662, the lowest since September 10, 2010, according to Bloomberg News.
In afternoon trading in New York, the Dow Jones Industrial Average fell 0.37 per cent and the Standard & Poor's 500 Index dipped 0.16 per cent. The Nasdaq Composite Index edged 0.09 per cent higher. Europe's Stoxx 600 Index ended the session with a 0.4 per cent decline.
Investors piled into US Treasuries instead; a US$32 billion auction of three-year notes drew record demand. Its bid-to-cover ratio was the highest since at least 1993, when the government began releasing the data, according to Bloomberg.
"The Europe situation is really driving the market. This is clearly a cause of concern in the marketplace," Larry Milstein, head of government and agency trading at RW Pressprich & Co in New York, told Reuters.
While Germany's economy grew 3 per cent last year from 2010, it contracted by about 0.25 per cent in the fourth quarter from the prior three months, according to the country's Federal Statistical Office. Another contraction might follow in the first three months of 2012, some economists forecast.
Separately, the European Union lowered euro-area growth to 0.1 per cent in the third quarter, from 0.2 per cent estimated earlier.
"Nothing has really been done to stimulate growth in Europe," Madelynn Matlock, who helps oversee about US$14.5 billion at Huntington Asset Advisors in Cincinnati, told Bloomberg.
"Without growth, you can't fix this issue. If Germany slows down, then, you start to have a real problem on how to make that happen. There's more risk on the earnings side as to how companies are going to come through all this."
A Reuters poll of economists forecast that the worst is yet to come in the euro zone's debt crisis, though they expect the currency union to survive 2012 intact.
Nine out of the poll's 64 economists said the bloc had turned the corner on a sovereign debt crisis, only 10 said the euro zone would not survive the year in its current form. The rest were reasonably confident it would.
"All eyes are still on Greece. The situation looks extraordinarily bleak. The household sector is getting hammered ... the banking sector is getting pummelled to pieces," James Nixon at Societe Generale told Reuters. "But if someone keeps writing the cheques Greece will survive."
Fitch Ratings urged Europe's central bank to do more. The European Central Bank should ramp up its buying of troubled euro zone debt to support Italy and prevent a "cataclysmic" collapse of the euro, said David Riley, the head of global sovereign ratings for Fitch, at a conference in Frankfurt.
"The ECB, clearly, does need to be more actively engaged," Riley said. "It would be a less costly and risky strategy if the ECB committed more openly."
In the US, the Federal Reserve is set to release its Beige Book survey of economic conditions today.
With the American labour market finally making some headway as employers added 1.64 million workers in 2011, the best year since 2006, economists Peter Cappelli and John Silvia say there's more strength ahead in 2012.
Last year's employment increases "are good signs for this year," Cappelli, a labour economist and director of the Center for Human Resources at the University of Pennsylvania's Wharton School, told Bloomberg. "Manufacturing is the most important story because it has spillover effects on other industries in a way that services may not."