The euro dropped on Friday, hurt by a spate of negative news out of Europe ranging from the German chancellor's rejection of a euro zone bond to unexpectedly low private participation in Greece's debt program.
Analysts, however, were unsure as to where the euro is headed going into next week, seeing vulnerability in both directions.
The weak trend could persist, some said, as no new policy initiatives to deal with the euro zone debt crisis came out of the European Union Finance Ministers' meeting on Friday.
On the other hand, other analysts said, it seemed all efforts are being undertaken by individual euro zone governments to ease the region's fiscal problems. The euro, they argued, could stabilize next week and trade above the seven-month lows beneath $1.35 hit on Monday.
The market probably senses that even though there is no comprehensive solution in the immediate offing, the risks that had been factored in at the beginning of the week have not been prevalent, said Bob Lynch, head of G10 FX strategy at HSBC in New York.
Shares in BNP Paribas and Credit Agricole slumped on Friday, with traders citing talk that ratings agency Moody's could downgrade Italy after the market close on Friday. BNP Paribas and Credit Agricole are the two French banks most exposed to Italy.
The euro was last down 0.7 percent at $1.37851 EUR=EBS, off a one-week peak of $1.39370 hit on Thursday but held above a seven-month trough below $1.35 plumbed on Monday. The euro has gained around 1.6 percent so far this week, its best weekly performance since the week of July 24 on trading platform EBS.
It fell to a session low of $1.37530, with traders saying it extended losses after stop-loss orders were triggered on the break of $1.37700, with more stops at $1.37500.
German Chancellor Angela Merkel's reiteration on Friday of her objection to the introduction of euro bonds, and an unexpectedly low 75 percent participation in Greece's debt initiative, below the 90 percent target, added pressure to the euro.
U.S. Treasury Secretary Timothy Geithner is taking part told EU finance ministers on Friday they should end loose talk about a euro zone break-up and work more closely with the European Central Bank to tackle the debt crisis.
The euro had hit a one-week high after a coordinated move by central banks on Thursday to provide dollars. Funding strains, evident through the cross currency basis swap market, which had hit some euro zone banks, appeared to be easing.
The three-month euro/dollar cross currency basis swap EURCBS3M=ICAP, or the relative premium for swapping euro LIBOR for dollar LIBOR, tightened to minus 88 basis points on Friday, a day after the central banks acted. It narrowed from as wide as minus 115 basis points on Monday.
FED MEETING AHEAD
While investors remain wary of the euro, they are also reluctant to take long positions in the dollar ahead of a Federal Reserve meeting next week, where policymakers may flag another round of quantitative easing to boost the economy.
That move should weigh on the dollar and help riskier assets rally, although analysts said some market players thought Operation Twist was the more likely outcome.
In such a scenario the Fed would buy longer-dated Treasury bonds and sell shorter-dated ones to keep rates at the longer end lower without expanding the balance sheet.
The ICE Futures' dollar index was last up 0.5 percent at 76.633 .DXY. Against the yen, the dollar was up 0.2 percent at 76.870 yen JPY=EBS. The threat of Japanese intervention has helped keep dollar/yen in a tight range and above its all-time low of 75.94 yen.