LONDON: The darkening outlook for the European economy sent the euro to a nine-day low against the dollar on Friday and ended a week-long rally in the region's share markets.
But the moves were limited by the approaching jobs report from the United States, due at 1330 GMT, which could fuel expectations that the Federal Reserve will announce a fresh round of monetary policy easing next week.
The yen also briefly rose when a powerful earthquake struck north-eastern Japan, triggering a tsunami warning. A strong earthquake in March 2011 had led to a sharp rise in the yen on expectations that Japanese investors will repatriate funds held abroad back home.
The euro was down 0.3 percent at $1.2927, extending its retreat from a seven-week peak of $1.3127 hit on Wednesday, on heightened talk that the weakening economic outlook will prompt an early rate cut by the European Central Bank.
The gloom surrounding euro zone deepened on Friday when Germany's central bank cut its growth outlook and pointed to risks of a recession as the three-year old debt crisis takes its toll on the region's largest economy.
The bleak warning came just a day after the ECB slashed its own economic forecasts for the entire 17-nation euro area next year, while leaving its main interest rate at a record low 0.75 percent for the fifth month running.
"The discussion on interest rates is what started the slide in the euro in the last 24 hours and the Bundesbank report has just compounded that," said Neil Mellor, currency strategist at Bank of New York Mellon.
CLOUDS DARKEN
The shift in focus back to Europe's problems and away from the outlook for China and the US, were hopes had been growing of gradual strengthening in economic activity, brought a rally in European shares to a close.
The FTSEurofirst 300 index of top European shares, which hit an 18-month peak on Thursday, was virtually unchanged at 1,130 points while Germany's Dax, London's FTSE 100 , and Paris's CAC-40 were all little changed.
"You cannot stand in the way of the numbers, which tell us Europe will be in a recession next year and earnings will be poor," Justin Haque, a broker at Hobart Capital Markets, said.
The bad news extended to the British economy as well with manufacturing output falling in October at the fastest pace since June and well below most economists forecasts.
Analysts said the data pointed to further contraction in the economy as a whole in the fourth quarter.
A slight dip in US stock futures hinted at a cautious Wall Street open, although much hangs on the nonfarm payrolls data.
Analysts expect the US economy added about 93,000 extra jobs in November, against October's gain of 171,000 as superstorm Sandy took its toll on the figures. The unemployment rate is seen holding steady at 7.9 percent.
A weak payrolls number, with a higher unemployment rate, would increase expectations that Federal Reserve policymakers would opt to further ease policy at its next meeting scheduled for Dec 11-12.
Many economists think the US central bank will announce monthly bond purchases of $45 billion after the meeting, and signal it will continue to pump money into the US economy during 2013 in a bid to bring down unemployment.
The concern about economic weakness in Europe and the U.S kept oil prices on course for their biggest weekly decline in a month, though expectations of a recovery in China limited the moves.
"The big picture is that Europe is weak, (the) US is undecided and China is strong, so the news flow from these three will be what determines prices," said Jonathan Barratt, chief executive officer at research firm Barratt's Bulletin.
Brent crude added 33 cents to $107.36, while US crude futures inched up 15 cents to $86.41.
Gold prices eased back below $1,700 an ounce but again but trading was cautious ahead of a US employment report.
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