Euro sinks to 18-month low on growth threat fears

By Steven C. Johnson

NEW YORK (BestGrowthStock) – The euro plunged to an 18-month low against the dollar on Friday as investors worried that harsh spending cuts mandated by a bailout plan may choke off a fragile recovery in the 16-country euro zone.

The euro traded below $1.24 for the first time since late 2008 and was down 4.2 percent this week — its weakest performance since the week ending October 26, 2008.

On Monday, the currency neared $1.31 after the European Union and International Monetary Fund pledged up to $1 trillion in aid to euro zone countries that get into financial trouble.

The rebound was brief, though, and investors began betting that deep spending cuts and tax increases required of countries such as Greece, Spain and Portugal would slow European growth just as data has started to show a U.S. economy on the mend.

“There is a lot of belt-tightening that lies ahead for euro zone countries,” said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston. “You have a tight fiscal policy and weak monetary policy and that’s a recipe for currency weakness.”

The debt crisis is expected to prevent the European Central Bank, which started buying European government bonds this week, from raising record low borrowing costs any time soon.

The euro was 1.3 percent weaker at $1.2370 after hitting $1.2358, its lowest level since October 2008. It is already down more than 13 percent this year against the U.S. dollar, making it the worst-performing major currency.

Data released Friday showed speculative bets against the euro hit a record high in the week to May 11.

The euro fell (Read more about the trembling euro. ) 1.6 percent to 114.25 yen while the dollar slipped 0.5 percent to 92.22 yen. Sterling fell 0.4 percent to $1.4557.

“We’re still in the process of adjusting to a significantly weaker euro,” said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. “The long-term average is around $1.18 and we’re still above that.”

The euro was introduced in 1999 at $1.18, but fell to 82.28 U.S. cents in 2000. By mid-2008, it had risen above $1.60.

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Fear of fallout from a European debt crisis rattled other markets on Friday, with U.S. stocks (Read more about the stock market today. ) and commodity prices falling sharply. Australia’s dollar, a high-yield, higher-risk currency, fell 1 percent against the greenback.

“We have a market that’s very nervous about everything,” Action Economics strategist Ronald Simpson said.

The euro accelerated its losses after European Central Bank policymaker Axel Weber said markets should not underestimate lingering dangers to financial stability.

Also on Friday, German Chancellor Angela Merkel said Germany needs a strong euro but that the currency’s long-term stability depends on “political convergence.

Joseph Brusuelas, chief economist at Brusuelas Analytics in Stamford, Connecticut, said investors consider more closely coordinated fiscal policy among euro zone countries crucial for the euro’s future.

“Unless we see those measures taken over the next six months to a year, I think people are going to conclude that European banks have debts on their books that are worth far less than current market values suggest,” he said.

“Weber and Merkel are highlighting that success is not guaranteed, and all that does is underscore the stagnation the euro zone is facing,” Forex.com’s Dolan said.

Markets expect the ECB, which started buying European government bonds this week, to keep interest rates low for a prolonged period of time.

The Federal Reserve — the U.S. central bank, meanwhile, is seen lifting rates later in 2010, a view that was bolstered by data on Friday showing U.S. retail sales and industrial production rose last month, while consumers felt a more confident about the economic outlook.

“It is going to be challenging to implement austerity budgets given the sluggish growth prospects in Europe,” said Wells Fargo currency strategist Vassili Serebriakov. “That means the Federal Reserve will be raising rates well before the ECB, which is frankly easing policy” through bond purchases.

Investment Analysis

(Additional reporting by Wanfeng Zhou; Editing by James Dalgleish)

Euro sinks to 18-month low on growth threat fears