February 4, 2010 / 4:31 PM / 10 years ago

FOREX-Euro/dollar 7-mth low over euro zone fiscal woes

* Euro hits low on Spain, Portugal fears

* ECB leaves rates on hold, BoE pauses QE

* Trichet recovery/fiscal outlook hurts euro

(Recasts, updates prices, adds comment)

NEW YORK, Feb 4 (Reuters) - The euro plunged to a fresh seven-month low against the dollar on Thursday amid growing concerns over the fiscal health of debt-laden euro zone countries.

European Central Bank President Jean-Claude Trichet predicted many members in the bloc will have large, sharply rising fiscal imbalances.

The ECB chief spoke at a news conference after the ECB left its benchmark lending rate unchanged at 1 percent. Trichet said high public debt and deficits would place additional burdens on monetary policy. For details see [ID:nECBNEWS]

Worries over debt levels in Spain and Portugal have increased as investors speculate the two countries may face budget deficit and debt problems like those of Greece. [ID:nLDE6121AC]. Such concerns helped lift the relatively safer haven U.S. dollar and yen.

Traders sold the single European currency on the view dismal public finances in euro zone countries may hinder any economic improvements in the region.

“Basically (Trichet is) acknowledging a very drawn-out, sluggish recovery subject to intense uncertainty,” said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. “The key thing is that rates are not moving anytime soon. With that and continued concerns over the fiscal situation, it’s just another weight around the euro’s neck.”

In late morning New York trade, the euro EUR= was trading down 0.9 percent on the day at $1.3780, close to an earlier low of $1.3778, its weakest since June 2009. Weakness was partly attributed to widening Greek, Portuguese and Spanish bond yield spreads over German benchmarks. [GVD/EUR]

Traders said an options barrier at $1.3800 was broken by sellers, opening up further downside.

“Looking ahead, the Governing Council expects the euro area economy to grow at a moderate pace in 2010,” Trichet said. “The recovery is likely to be uneven and the outlook subject to uncertainty.

Sterling trimmed some losses against the dollar after the Bank of England announced a pause in asset purchases under quantitative easing, as expected. It left the door open to more purchases should the outlook warrant it. [ID:nLAC005630]

But the pound still traded at $1.5781 against the dollar GBP=, down 0.7 percent on the day though above an earlier three-and-a-half month low of $1.5760.

STRONG U.S. DATA

Euro zone fiscal problems increase chances the U.S. economy will recover more quickly and the U.S. central bank will lift interest rates before the European Central Bank. Such a move would make dollar-based assets more attractive.

Mostly strong U.S. data this week supported this view, though risk-averse traders flocked to the yen, particularly after data showed initial U.S. weekly jobless claims unexpectedly rose last week.

The dollar JPY= was 0.7 percent lower at 90.31 yen. The euro EURJPY= fell 1.6 percent to 124.46 yen.

Investors are now largely focused on the key U.S. non-farm payrolls numbers due on Friday. ECONUS

The dollar index .DXY, a calculated measure of the dollar’s performance against a basket of six currencies, rose to 79.934 against a basket of currencies, it’s highest since July, 2009. The dollar index was last at 79.889.

The New Zealand dollar NZD= hit a five-month low after data showed the country's jobless rate hit a 10-year high while weak Australian retail sales data helped push the Aussie AUD= to a four-month low.

Additional reporting by Wanfeng Zhou in New York and Neal Armstrong in London Reporting by Nick Olivari; Editing by Andrew Hay

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