The euro fell against the dollar on Friday and headed for its worst quarter since mid-2010 as investors fretted over the lack of a credible solution to Europe's debt crisis, which risks dragging the continent back into recession.
Fears of a Greek debt default and its fallout on European banks accelerated in recent months. That, combined with a slowing global economy, prompted investors to ditch riskier currencies such as the euro and Australian dollar and flock to the safer U.S. currency.
Analysts said the euro could fall further into year-end, after weak German retail sales data on Friday highlighted a grim outlook for euro zone growth. In addition, markets deemed the latest expansion of the European Financial Stability Facility insufficient to protect larger states like Italy and Spain and Europe's banking sector.
The combination of sovereign debt crisis, a slowing economy and really what appears to be ineffective leadership in Europe has led to this decline and we expect that to continue to play out in the fourth quarter, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
We expect the euro to continue to trade to the downside, he said. Barring any major positive surprises from policymakers in Europe, a year-end target around a $1.20-$1.25 range is pretty realistic.
Economy Minister Philipp Roesler said Friday that Germany's parliament would not be willing to leverage the crisis fund to provide enhanced support for stricken euro zone states, a day after the country approved an expansion of the euro zone rescue fund.
The euro fell 1.1 percent to $1.3445, having hit a session trough of $1.34263 on trading platform EBS and edging back toward its lowest in eight months of $1.3360 set on Monday.
It is on track for a 7.4 percent decline this quarter and 6.6 percent this month, the biggest monthly loss in 10 months.
German retail sales fell at their fastest pace in more than four years in August, suggesting unease about the euro zone debt crisis prompted some consumers to delay big-ticket purchases.
The euro options market shows investors needing to pay more for downside protection than for the upside, which highlights concern over a deeper spot fall.
Euro zone finance ministers meet next week to discuss more ways to help Greece, but few in the market are expecting aggressive measures to isolate other countries should Athens default on its debts.
Some investors have speculated about the possibility of a near-tern interest rate cut by the European Central Bank, but a higher-than-expected euro zone inflation reading for September dampened such prospects.
The dollar traded little changed at 76.82 yen.
Against a basket of currencies, the dollar rose 0.6 percent to 78.496 and was up 5.6 percent this quarter, the best performance since mid-2010.
Month-end demand supported the dollar as market participants said non-U.S. fund managers needed to buy the currency after a sell-off in U.S. equity markets this month forced them to rebalance their currency hedge portfolios.
The New Zealand dollar slipped 0.6 percent to $0.7659 a day after ratings agency Fitch cut New Zealand's credit rating by one notch to AA.
The Australian dollar lost 0.6 percent to $0.9720 and was on track for its worst quarter since the end of 2008, with a drop of 9.3 percent.