NEW YORK (Reuters) - The euro tumbled to its lowest level in more than 18 months against the U.S. dollar on Friday on heightened fears a sovereign debt crisis in the euro zone will worsen and choke a fragile recovery.
The euro accelerated its decline to trade below $1.24 as U.S. stocks sank and European Central Bank policymaker Axel Weber said dangers still lurk in the financial system and should not be underestimated.
After climbing close to $1.31 following last weekend’s agreement of a $1 trillion emergency rescue package, the euro has come under renewed pressure as the focus has shifted to the impact on growth from fiscal tightening in Greece, Spain and Portugal.
“There’s continued pessimism on the euro,” said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston. “There are still a lot of doubts about how European policymakers will be able to successfully maintain the regional growth story.”
In midday trading, the euro was down 1.1 percent at $1.2393. It had earlier fallen as low as $1.2358 on electronic trading platform EBS, the lowest since October 2008.
The euro’s slide set it on track for a loss of about 4 percent this week, the biggest since October 2008, according to EBS data. It has fallen more than 13 percent against the U.S. dollar this year, making it the biggest decliner among major currencies.
Weber, who heads Germany’s Bundesbank, said in a speech in Rio de Janeiro that the financial crisis was still throwing up new challenges and it’s important not to underestimate the dangers to financial stability.
On Thursday, German Chancellor Angela Merkel said the future of the European Union was at stake and that the euro must be defended.
“Weber and Merkel are highlighting that success is not guaranteed, and all that does is underscore the stagnation the euro zone is facing,” said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
“We’re still in the process of adjusting to a significantly weaker euro,” Dolan said. “The long-term average is around $1.18, and we’re still above that.”
James Chen, chief technical strategist at FX Solutions, said the immediate bearish support for the euro/dollar is at around 1.2300, a break of which could open the way for a decline towards the psychologically important 1.2000 level.
Group of Seven finance ministers held a conference call on Friday to discuss developments surrounding Greece’s debt crisis, a G7 source told Reuters but gave no further details. Traders said the news had little impact on the euro.
“It would be more frightening if these guys didn’t talk to each other,” said Ronald Simpson, director of currency research at Action Economics in Tampa, Florida.
Some traders said market speculation of a Fitch downgrade for France also hit the euro. Fitch said it has not made any change to its rating for French sovereign debt, which remains AAA with a stable outlook.
Expectations have grown that the euro zone’s fragile economies will force the European Central Bank, which started buying the region’s government bonds this week, to keep interest rates low for a prolonged period of time.
“There is a lot of belt-tightening that lies ahead for euro zone countries,” BNY Mellon’s Shankar said. “You have a tight fiscal policy and weak monetary policy and that’s a recipe for currency weakness.”
The single euro zone currency also lost 1.9 percent to 113.85 yen, while it held steady at 1.4010 Swiss francs, near Thursday’s all-time low, with investors wary of potential Swiss National Bank intervention.
The dollar fell 0.9 percent to 91.89 yen. The ICE Futures U.S. dollar index, which tracks the value of the greenback versus a basket of major currencies, hit a one-year high at 86.243 .DXY.
“We have a market that’s very nervous about everything,” Action Economics’ Simpson said. “The risk averse trade is back, which helps the dollar and yen.”
Additional reporting by Steven C. Johnson; Editing by Kenneth Barry