The euro hit fresh 18-month lows against the dollar on Friday as concerns intensified that fiscal austerity measures in the eurozone would dampen a fragile recovery, prompting a flight from riskier assets. After rising to around $1.31 following last weekend's agreement of an emergency $1 trillion anti-crisis package, the euro has been under pressure for most of this week as investor focus has shifted to the impact on growth from tightening fiscal policy.
Portuguese leaders agreed tough austerity measures on Thursday, a day after neighbouring Spain announced similar measures involving reductions in civil service pay and job cuts. They follow crisis-hit Greece where stringent austerity measures risk aggravating recession, leading investors to believe the euro zone's fragile economies will encourage the European Central Bank - which started buying the region's government bonds in sterilised operations this week - to keep interest rates low.
"Fundamental worries are that interest rates will remain low for longer because more fiscal austerity measures will mean lower growth going forward," said Marcus Hettinger, global FX strategist at Credit Suisse in Zurich. By 1125 GMT, the euro had clawed its way back to $1.2470 after falling as low as $1.2433, its weakest since November 2008, led by aggressive selling from macro hedge funds.
Traders said large option-related stop-loss orders at $1.2499 and $1.2450 accelerated the currency's slide, adding the October 2008 low around $1.2330 was a now target to watch. The euro has fallen more than 13 percent against the dollar and yen this year, making it the biggest loser among major currencies.
It lost 1.1 percent on the day to 114.78 yen before recovering slightly to 115.35. The euro held steady however at 1.4015 Swiss francs, near Thursday's all-time low, with investors focusing on potential for further Swiss National Bank intervention. The dollar hit a one-year high against a basket of currencies at 85.873 while it fell 0.2 percent to 92.50 yen.