NEW YORK The euro fell against the dollar for a second straight week and global stocks edged lower on Friday, weighed by renewed concerns over euro zone debt after a multi-notch downgrade of Ireland's credit rating.
Investors shifted into safe-haven bonds and sold the euro after Moody's slashed Ireland's rating by five notches, warning further downgrades could follow.
U.S. Treasury securities rallied, causing yields to decline, as the market got a boost from the Federal Reserve on Friday with its latest purchase of long-dated bonds.
Moody's move on Ireland followed Fitch's three-notch downgrade last week. Earlier this week, Moody's placed Spain and Greece on a review for possible downgrades.
"While the Moody's downgrade of Ireland isn't any surprise, the sheer magnitude of five notches warrants a mention. We haven't seen anything like this since the Asian crisis," said Win Thin, senior currency strategist at Brown Brothers Harriman in New York.
"We foresee ongoing downgrades for peripheral -- and perhaps even some core -- euro zone countries over the course of 2011 as the debt ratios are going to get much worse before they get better," Thin added.
World markets gained little comfort from a European Union summit, at which leaders agreed to create a permanent financial safety net from 2013 but provided no new measures to deal with the immediate crisis.
"Everyone should be troubled with the situation in Europe, and we don't think this the last of the news," said Matt King, chief investment officer at Bell Investment Advisors in Oakland, California, which oversees $400 million in assets.
European banks were under severe selling pressure over Ireland's debt situation. At the close in New York, U.S.-listed shares of Allied Irish Bank (AIB.N) were down 4.6 percent to $1.22 while Barclays (BCS.N) dropped 2.1 percent to $16.24.
U.S. stock markets closed near multi-year highs on Friday, as the S&P edged higher, but more meaningful gains may be hard to come by in the next two weeks, which are traditionally quiet.
U.S. benchmark indexes closed mixed. The Dow Jones industrial average .DJI fell 7.34 points, or 0.06 percent, to 11,491.91, while the Standard & Poor's 500 Index .SPX rose 1.04 points, or 0.08 percent, to 1,243.91. Gains in the technology sector lifted the Nasdaq Composite Index .IXIC 5.66 points, or 0.21 percent, to 2,642.97.
The FTSEurofirst 300 .FTEU3 index of top European shares closed down 0.44 percent at 1126.28, dragged by banks .FTNMX8350, which dropped 1.49 percent. As one example, shares of Royal Bank of Scotland (RBS.L) dipped 5.73 percent.
The MSCI's all-country world stock index .MIWD00000PUS slipped 0.02 percent, while the Thomson Reuters global stock index .TRXFLDGLPU fell 0.15 percent.
EURO PRESSURES MARKETS
The euro sank against the dollar, hitting a two-week low after a drop below $1.32 triggered automatic sell orders.
After a blip of positive news from better-than-expected data on German business morale, the euro slid as low as $1.3133 on trading platform EBS, and was last down 0.43 percent at $1.3179. A break below $1.3104, its 200-day moving average that is deemed a near-term support level, could lead to a further decline, traders said.
Bolstered by the weak euro, the dollar .DXY rose against a basket of major currencies by 0.26 percent at 80.392. Against the Japanese yen, however, the dollar softened 0.1 percent to 83.96.
With the dollar on stronger ground, gold and oil prices slipped. At U.S. market close, crude oil 38 cents, or 0.43 percent, to $88.08 per barrel, while spot gold prices climbed $6.15, or 0.45 percent, to $1375.40.
As investors sought security in the tumultuous market, U.S. Treasury securities rallied. The benchmark 10-year U.S. Treasury note was up 25/32 points in price, yielding 3.3356 percent. The 30-year note jumped 53/32 to yield 4.4376 percent.
Over the last two weeks, Treasuries have been selling on concerns of ballooning deficits, stemming from the extension of the Bush-tax cut plan. Late Thursday, the U.S. House of Representatives passed the deal between U.S. President Barack Obama and Republican leaders to extend expiring tax cuts. The measure now goes to Obama to sign into law.
(Additional reporting by Natsuko Waki, Brian Gorman and William James in London, Ryan Vlastelica, Wanfeng Zhou, Karen Brettell and Gertrude Chavez-Dreyfuss in New York, Editing by Chizu Nomiyama)