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Originally published Thursday, May 6, 2010 at 6:56 AM

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European debt fears drive euro near $1.25

The euro sank to a 14-month low near $1.25 Thursday as the stock market plummeted on a lack of confidence in European leaders' ability to contain the debt crisis.

AP Business Writer


The euro sank to a 14-month low near $1.25 Thursday as the stock market plummeted on a lack of confidence in European leaders' ability to contain the debt crisis.

Investors dumped riskier assets for the safety of the U.S. dollar as the Dow Jones industrials dropped almost 1,000 points in less than half an hour. The dramatic drop was the largest loss ever during the course of a trading day, though the Dow recovered much of its lost ground and ended down 347.

Traders worry that Greece's debt woes could hinder a global economic recovery. The European Central Bank did not offer more support to European countries struggling with debt and left interest rates unchanged at 1 percent.

The euro has been battered this week on fears that more aid may be needed for Portugal and Spain to keep from defaulting as bonds come due, borrowing costs remain high and their economies stagnate or decline. The euro has fallen as much as 7 cents, or 5.8 percent, the sharpest weekly drop since October 2008.

"There's a real problem in Europe ... (and) there isn't an effective means to address the crisis," said David Gilmore of Foreign Exchange Analytics in Essex, Conn. "As long as this crisis is burning out of control you can count on the dollar being strong."

The euro plunged to trade as low as $1.2523, its weakest point since March 2009. In late New York trading, the euro bought $1.2602, compared with $1.2827 late Wednesday.

"I wouldn't rule out a move towards parity," Gilmore said. One dollar could buy one euro in as little as a few weeks because European policymakers seem unable to keep ahead of the spiraling debt problems, he said.

On Thursday, the European Central Bank said it would not take any extraordinary steps to help support indebted countries using the euro, as markets had hoped it would. The president of the European Central Bank, Jean-Claude Trichet, said that the bank did not even discuss buying government bonds on the market. He also said there was no dicussion of an orderly default mechanism for the 16 countries using the euro.

European politicians and banking officials have been "very reactive," said Win Thin, senior currency strategist at Brown Brothers Harriman. If they'd moved to help Greece in January, borrowing costs for other countries might not have taken off. At this point, the countries using the euro might not have the resources to give Portugal and Spain bailouts if they need it, Thin said.

In other late trading in New York, the British pound sank to its lowest point in a year to trade at $1.4715, compared with $1.5101 late Wednesday. The dollar surged to 1.0617 Canadian dollars from 1.0314 Canadian dollars, and gained against other currencies of countries that are big commodity exporters, such as Brazil and Australia, as prices of oil, gas and some metals fell.

The dollar fell to 89.10 Japanese yen from 93.65 yen and slipped to 1.1119 Swiss francs from 1.1169 francs. Investors view the dollar, Swiss franc and yen as relatively safe assets.

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