The euro fell to its lowest in more than seven weeks against the US dollar on Friday and was poised to weaken further after a disappointing Italian bond auction stoked fears the euro zone crisis was deepening.
Italy paid a record 6.5 percent to borrow money over six months on Friday and its longer-term funding costs soared far above levels that are seen as sustainable. The rise in borrowing costs came even as the European Central Bank bought bonds in the secondary market.
Standard & Poor's added to those worries after the rating agency lowered Belgium's rating by a notch to AA and placed its credit outlook on negative.
Signs the euro zone debt crisis was threatening the region's biggest economies such as France and Germany have raised fears of a breakup of the 17-member currency bloc. Policymakers remained in disagreement over how to resolve the crisis, with Germany opposed to joint euro zone bonds and a bigger role for the ECB.
"There appears to be no credible plan in sight to solve the euro zone debt crisis. It shows that there are legs to the market view that the euro zone might be dismantled," said Joe Manimbo, senior market analyst at Travelex Global Payments in Washington.
The euro fell 0.9 percent to $1.3226, having dropped as low as $1.3210, its lowest since October 4, according to Reuters data.
The US Labour Department's monthly jobs data is due next Friday and if they fall short of expectations, the euro should retrace its four straight weeks of decline against the greenback.
"If we get a negative surprise, that could make the dollar vulnerable," Manimbo said.
Key support for the euro lies around $1.3144, the euro's October low, followed by $1.3045, the 61.8 percent retracement of its 2010-2011 rally.
The euro lost 2.1 percent this week after poor demand at a German bond auction on Wednesday.
Bidding for Italian debt was also lackluster on Friday. Italy's two-year yield rose to a euro-era high above 8 percent and 10-year yields traded above 7 percent, a level that is seen as unsustainable.
"The Italian auction was a disgrace this morning, It was worse than what the market had expected," said Thomas Molly, chief dealer at FX Solutions at Saddle River, New Jersey.
Belgian bonds also succumbed to pressure ahead of auctions next week. The 10-year Belgian government note yield edged up to 5.89 percent on Friday, up 3 basis points on the day and up almost 100 basis points on the week.
Strains in the money market for euro zone banks added to investor concerns. The euro/dollar one-year cross currency basis swap, which widens when lenders charge more for swapping euro interest payments on an underlying asset into dollars, was at minus 104 basis points - close to expensive levels of minus 115 basis points in late 2008.
The dollar rose versus a currency basket to its highest since early October at 79.702 as investors raised their holdings of the US currency, undercutting the bids for Swiss franc.
"Unless we see firm action from European authorities, the market is betting the worst is about to happen and the dollar is therefore well bid on demand for liquidity," said Jane Foley, currency strategist at Rabobank.
Against the yen, the dollar rose 0.9 percent to 77.74 after hitting a two-week high of 77.79, according to Reuters data.
The euro hit a seven-week low of 102.46 yen based on Reuters data, before rebounding to 102.90, flat on the day.
The Swiss franc tumbled against the dollar and euro on speculation the Swiss National Bank may raise the ceiling on euro/Swiss franc from the current 1.20 level.
The dollar last traded up 1.2 percent at 0.9308 Swiss franc after approaching an 8-month high at 0.9330. It was on track for a gain of 1.3 percent this week, its fourth straight weekly advance.
The euro rose 0.4 percent to 1.2315 francs, after hitting a session high of 1.2380.For all the latest currencies and forex rate news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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