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Euro falls to 18-month low

By Ben Rooney and Chavon Sutton, staff reporters


NEW YORK (CNNMoney.com) -- The euro fell to an 18-month low against the dollar Friday as investors remain worried about the outlook for economic growth in Europe.

What prices are doing: The dollar rose 1.4% against the euro to $1.2365. Earlier, the euro fell to a low of $1.2359, the lowest level since November 2008.

chart_ws_currency_usd_eur.03(2).png

The dollar rose 0.6% versus the British pound to $1.4524. It was down 0.3% against the Japanese yen at ¥92.45.

What's moving the market: Earlier in the week, the euro leaped on the weekend announcement of a nearly $1 trillion European rescue package. But as the week wore on, investors turned back to lingering problems in the euro zone.

On Friday, the euro broke through key technical levels, which accelerated the selling and raised concerns that the shared currency could fall as low as $1.20.

"The euro broke through all the key selling barriers," said Boris Schlossberg, director of currency research at GFT, a New York-based trading firm. "Everybody is rushing for the exits at the same time."

He said much of the selling was related to hedging strategies by funds that aren't normally active in the currency market. While the sell-off was not prompted by any new development, he said investors are increasingly concerned about the long-term outlook for the European economy.

As other countries announce austerity plans to avoid issues seen in debt-choked Greece - which sought a bailout and saw its sovereign debt downgraded to junk status - investors are worried the cuts could stifle economic growth in Europe.

"The austerity measures are very deflationary," said Schlossberg. "The impact on growth going to be very substantial going forward."

Portugal: On Thursday, Portugal's government outlined a plan to cut its budget deficit - including 5% pay cuts for politicians and public-sector staff leaders, and a "crisis tax" on personal income and large corporations.

The Portuguese government said its plan is to cut the deficit to 7.3% of gross domestic product in 2010 and to 4.6% in 2011.

Spain: On Wednesday, Spain's prime minister said its government planned to cut civil service wages by 5% in 2010 and freeze them in 2011. More than $7.6 billion will be cut from public investment funds.

The $19 billion of total Spanish spending cuts aim to cut the country's deficit to 9.3% of GDP in 2010 and to 6% in 2011.

What analysts are saying: Brian Dolan, chief currency strategist at Forex.com, says the markets are becoming overly bearish, especially in the wake of the European Union's efforts to prop up the euro.

"Market prices have become a bit extreme," said Dolan, adding that the over 9% drop in the euro in recent weeks is "bordering on disorderly."

Still Dolan says the euro has further to fall. He forecasts a decline to between $1.15 and $1.18 by year-end. The euro could reach parity - equal value with the U.S. dollar - by 2011, he says. That could potentially hurt exports to so-called euro zone nations.

In the short term, however, Dolan expects the shared currency to stabilize and this could trickle into other risky assets such as stocks and oil. Couple that with signs that the global economic recovery is on solid footing, and the recent sell off could prove to be a good investment opportunity, he says.

"The global recovery is ongoing. Although Europe poses a risk [to it], it won't cut it short," said Dolan. "That makes buying risk on this pullback a good opportunity."

--Staff reporter Julianne Pepitone contributed to this report To top of page

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