Euro down 7.5 percent for quarter; more losses seen

Arrangement of various world currencies including Chinese Yuan, Japanese Yen, US Dollar, Euro, British Pound, Swiss Franc are pictured in Warsaw January 26, 2011.

NEW YORK (Reuters) - The euro was on track on Friday to close out its worst quarter against the dollar since June 2010, and the growing concern about the euro zone's ability to to resolve its debt problems was expected to keep it under pressure in the week ahead.

As of late Friday afternoon, the euro for the quarter was down 7.5 percent against the dollar, last trading at $1.34176.

Some investors said a Greek debt default is already priced in, something that would help the single currency contain losses. But with most investors still hopeful there will be no default, that means there is still room for the single currency to fall.

The European Central Bank's former chief economist, Otmar Issing, was cited in media reports this week saying that a Greek default and a Greek move out of the euro zone was inevitable in order to prevent contagion to other peripherals.

"Europe is still the driver," said Gareth Sylvester, senior currency strategist at San Francisco-based Klarity FX, as he highlighted moves to increase the size of the euro zone's bailout fund, the European Financial Stability Facility.

"The big talking point was the EFSF, and though it was ratified by the Gernans, there are still questions over its size and if it is big enough," he said.

The boost to the euro on Thursday generated by the German Parliament's approval of new powers for the bailout fund proved fleeting on Friday with data showing German retail sales slumped at their fastest pace in more than four years in August.

Leaders in Germany's ruling coalition said they opposed moves to increase states' liabilities to the euro zone's rescue fund, keeping alive concerns that Europe will be not able to do enough to prevent the crisis from spreading.

The euro options market showed investors needing to pay more for downside protection than for the upside, which highlights concern over a deeper spot fall.

A gathering of euro zone finance officials early next week, a meeting of the European Central Bank governing council on Thursday, and a U.S. jobs report on Friday will add to event risk for the coming week.

Few in the market are expecting aggressive measures to isolate other countries should Athens default on its debts though Action Economics says some investors now expect the ECB to cut interest rates by 50 basis points.

But a higher-than-expected euro zone inflation reading for September has dampened the prospects of a rate cut.

Action Economics suggests the central bank is more likely to focus on liquidity enhancing measures.

With jobs and housing the two missing components of the U.S. economic recovery, Friday's U.S. non-farm payrolls report for September takes on more than usual significance.

Economists are predicting 60,000 new jobs for the month after no growth in the prior month.

While signs of U.S. economic growth had for months increased risk tolerance and prompted investors to buy the euro, sentiment may be shifting and better U.S. data may be prompting investors to buy the dollar.

The U.S. dollar extended gains against the yen and euro on Friday after data showed business activity in the U.S. Midwest rose more than expected.

Month-end demand has supported the dollar as market participants said non-U.S. fund managers needed to buy the currency after a sell-off in U.S. equity markets this month forced them to rebalance their currency hedge portfolios.

The Australian dollar was on track for its worst quarter since the end of 2008, with a drop of 9.4 percent, according to Reuters data.

Yet, the dollar slid 4.4 percent against the yen for the quarter, according to electronic trading platform EBS, its worst performance since the third quarter of 2010.

With the dollar last at 76.987 yen, still near the record low of 75.941 yen on EBS, investors will remain alert for possible intervention by the Bank of Japan.

"With no near-term resolution in sight for Greece, the U.S. dollar looks increasingly attractive with the BOJ expected to resist any further currency strength," said Michael Woolfolk, managing director at BNY Mellon Global markets in New York.

(Reporting by Nick Olivari; Editing by Leslie Adler)