Euro Poised for Further Declines

The euro is likely to face further declines this week as concern over sovereign debt in Europe prompts investors to seek refuge in the perceived safety of the dollar and the yen.

Pressure on the common currency escalated last week, as worries about the soundness of debt issued by Greece spread to other fiscally stressed euro-zone nations, including Portugal and Spain.

Over the weekend, at a meeting of finance ministers of the Group of Seven leading economies in Iqaluit, Nunavut, in Canada, European leaders pledged to address public debt problems.

“We expect and are confident that the Greek government will make all the necessary decisions,” said Jean-Claude Trichet, the European Central Bank president. Mr. Trichet added that European members of the G-7 will “continue to monitor closely the implementation of these stability measures.”

However, such statements may not be enough to prevent a renewed slide for the common currency this week. The euro’s losses were about 1.5% against the dollar last week, bringing its year-to-date slide to 4.6%. Against the yen, the common currency dropped Friday to a near 12-month low.

“Until we see signs of acceptance by those [nations] that austerity measures need to be put in place to resolve the fiscal imbalances, the euro will continue to deteriorate,” said Thanos Papasavvas, head of currency management at Investec Asset Management in London, which oversees about $60 billion.

Ballooning budget deficits in euro-zone countries threaten to hurt an economic recovery, forcing the ECB to keep interest rates low longer than anticipated, in contrast to expectations of quicker increases from the U.S. Federal Reserve.

Late Friday in New York, the euro was at $1.3665 from $1.3741 late Thursday. The dollar was at 89.38 yen from 88.93 yen, while the euro was at 122.14 yen from 122.20 yen. The U.K. pound was at $1.5631 from $1.5753. The dollar was at 1.0727 Swiss francs from 1.0656 francs late Thursday.

The G-7 finance ministers maintained the group’s stance on currency markets. The finance leaders, citing a previous statement they made in October 2009 in Istanbul, said they still want China “to move to a more flexible exchange rate” to help rectify growth imbalances between China and countries that have market-based currency rates.

“We have agreed there is no reason to change what we have said regarding exchange rates over the past months,” said Eurogroup Chairman Jean-Claude Juncker.

French Finance Minister Christine Lagarde said the strengthening U.S. dollar against the euro could be a positive development for the European economy. “We always complained about the dollar not being strong enough,” Ms. Lagarde said. “That is clearly an improvement.”

Concern over euro-zone debt increased Friday when Portugal’s Parliament approved an amendment to a regional finance bill that could expand the country’s budget deficit.

The situation in the economies of Portugal, Greece and Spain “is likely to deteriorate further and this is going to raise other issues, including … banks’ balance-sheet problems,” said Stephen Jen, who helps manage $1.5 billion at BlueGold Capital Management, a London-based hedge fund. “A meaningful turning point can only be established by an entity such as the [International Monetary Fund].”

Mr. Jen expects the euro to slide to a new trading range, between $1.30 and $1.35, in the short-term.

Meanwhile, investors will pore over data this week to gauge whether an economic recovery will stall, posing an additional challenge to the ECB’s Mr. Trichet, analysts said.

“We’ve seen a two-speed euro zone with economic and fiscal divergence being ever more evident between the core members of the euro zone and those in the periphery,” said Jeremy Stretch, senior currency strategist at Rabobank International in London. “If that divergence continues, it’s going to be an increasing headache for Mr. Trichet and for investors” with bets favoring the euro against its major rivals, he said.

Continued jitters over the debt problems should push the euro to test the $1.35 level this week, Mr. Stretch said.