NEW YORK: The euro slid to a 3-1/2-month low in volatile trade on Friday as political uncertainty in Greece and hefty losses disclosed by US bank JPMorgan Chase spurred risk aversion.
The euro has dropped against the dollar in eight of 10 sessions for a cumulative 2.4 percent decline, hit by the turmoil in Greece. Inconclusive election results last Sunday threw the country into political disarray and raised the risk that it could exit the euro zone and the European Union.
Greek Socialist party leader Evangelos Venizelos on Friday said he was unable to form a government, sending the country hurtling toward a new vote.
"If the same thing happens in the second round and you do not get a government in Greece, we think that will weigh on the euro," said Tom Higgins, global macro strategist at Standish Mellon Asset Management in Boston, which has assets under management of about $92 billion and is currently shorting the euro against the dollar.
The euro last traded 0.1 percent lower at $1.2918 after earlier hitting a trough of $1.2903, its lowest level since Jan. 23. The euro peaked at $1.2957.
Recent economic data has pointed to recession across Europe and could cause the European Central Bank to take action sooner rather than later, compared with the United States, which is still seeing growth, although at a slower rate.
"I think those factors are all going to come together to lead to a further down leg in the euro," said Higgins. "We would target something in the low to mid-1.20s over the next six to 12 months."
Even before the news on Greek politics on Friday, the euro and growth-linked currencies were under pressure as investors shunned risk after JPMorgan Chase & Co late on Thursday said it suffered a trading loss of at least $2 billion from a failed hedging strategy.
Analysts said many market players were resigned to further political uncertainty in Greece, meaning the euro would probably grind lower against the dollar rather than drop suddenly.
Options market participants are betting on more euro weakness, with three-month risk reversals showing a firm bias for puts, trading -2.7 vols, flat from Thursday, but up from -2.325 vols a week earlier and -2.150 vols at the start of the month.
"The net result is we are in a far worse position now than prior to the election," said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi. "The probability of Greece not being in the single currency by the end of this year is considerably higher and that eliminates risks to the upside in euro/dollar for the next few months."
Mounting concerns about the Spanish banking sector and the government's ability to check its budget deficit also weighed on the euro and left investors fretting about whether the debt crisis will ensnare Spain, the euro zone's fourth-largest economy.
Data showing that US consumer confidence hit a more than four-year high in early May gave a brief boost to the dollar against the yen, though that support was fleeting. The dollar was last little changed at 79.90.
Separate US data showed producer prices unexpectedly fell in April, a sign of easing inflation pressures that could give the Federal Reserve more room to help the economy should growth weaken.