NEW YORK (Dow Jones)--The euro sank Friday as sovereign debt weighed heavily on markets, with investors focused on fiscal issues in deficit-laden Greece spreading to Portugal and other euro-zone economies.
After fleeing from riskier assets for most of the New York session, investors made a last-minute attempt to bid U.S. stocks and commodities higher, but the euro benefited only marginally after a volatile day in which the common currency tumbled to a near 12-month low against the yen and the lowest level since May against the dollar.
"The markets are betting on a situation that I don't think will happen, which is a more extreme situation of default or an economy leaving the euro area," said Carlos Almeida Andrade, chief economist of Banco Esprito Santo in Lisbon.
That said, the euro could still decline to $1.30, or "a little bit further," he said, as investors weigh whether belt-tightening plans in Greece, Portugal and Spain will stop a possible contagion from infecting the entire euro zone.
Late Friday in New York, the euro was at $1.3663, down from $1.3741 late Thursday, according to EBS via CQG. The dollar was at Y89.38, up from Y88.94, while the euro was at Y122.14, down from Y122.20. The U.K. pound was at $1.5631, down from $1.5750. The dollar was at CHF1.0729, up from CHF1.0655.
The Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 80.323, up from 79.907. The index on Friday hit its highest level since July.
As a result, Deutsche Bank's PowerShares US Dollar Index Bearish (UDN) exchange-traded fund was down 0.56% from late Thursday, while its PowerShares US Dollar Index Bullish (UUP) was up 0.38%. The two exchange-traded funds are based on Deutsche Bank currency futures indexes, whose composition mirrors that of ICE's Dollar Index.
"The risk aversion and concern over sovereign credit has replaced the euphoria that economies were coming out of the doldrums," leading investors to the safety of the dollar and yen, said John McCarthy, manager of currency trading at ING Capital Markets in New York. "Risk is being sold off," he said.
European Central Bank President Jean-Claude Trichet on Friday rejected the idea that there could be an extraordinary meeting of the ECB amid concerns about the heavily indebted countries in the euro zone.
Trichet was asked about the possibility of such a meeting held this weekend as he arrived for a weekend Group of Seven meeting of finance officials, to which he responded, "No, it's untrue."
The euro took a hit earlier after Portugal's parliament approved Friday an amendment of a regional finance law that could add to the country's rising budget deficit. The euro sank further after the Portuguese legislators passed the measure, despite the Finance Ministry's appeal to the contrary.
"There's some uncertainty that stems from that vote, having gone the way it did," said Brian Kim, currency strategist at UBS AG in New York. "In an environment where the sovereign risk is at the forefront, any uncertainty on the political aspect adds to negative pressure."
Demand for the common currency has dried up amid worries that ballooning budget deficits in the peripheral nations of the euro zone will stall economic growth and keep the European Central Bank from lifting key interest rates, resulting in the bank possibly lagging the U.S. Federal Reserve when it comes to tightening monetary policy.
Investors earlier shrugged off mixed U.S. employment data showing that the U.S. economy continued to shed jobs in January, while the unemployment rate unexpectedly improved. Instead, investors focused squarely on the euro-zone debt woes, analysts said.
The U.S. unemployment rate fell to 9.7% in January from an unrevised 10% in December, the Labor Department said Friday; economists had expected a rise.
Nonfarm payrolls fell by 20,000 compared with a revised 150,000 decline in December. Economists had expected payrolls to be flat. The December figure was revised sharply from an originally reported 85,000 drop.
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