The euro languished near a 14-month low versus the dollar and European shares fell on Friday on speculation that fiscal austerity in some euro zone countries may stifle economic growth.
High-risk assets including stocks took a hit while gold hovered near a record high and the dollar hit its highest level versus a currency basket in a year, as worries about the euro zone debt crisis prompted demand for safer investments.
European authorities announced a massive debt safety net for Greece, Spain and Portugal this week, but investors remain skeptical whether those countries can take the pain of overhauling their poor public finances.
The 'euphoria' triggered by the EU/IMF/ECB measures seems to have been receding, JP Morgan analysts said in a research note.
Under such conditions, the near-term bias seems to be skewed toward falling risk assets and EUR accompanied by rising USD ... on any negative headlines.
In early European trade, the euro slipped slightly on the day to $1.2525. Last week it dipped as far as to $1.2510, its weakest since March 2009.
The weak euro helped to push the dollar <.DXY> up to 85.466 against a basket of major currencies, its highest since late April 2009.
The single European currency had rebounded as high as $1.31 earlier this week, and many analysts were focusing on whether it would be able to hold above $1.2500, where options barriers were seen lined up on Friday.
The euro hasn't derived any benefits from any budget cuts from Spain and Portugal, said Chris Turner, head of FX strategy at ING, which forecasts the euro will be at $1.15 in six months.
People are either concluding that these cuts will be unsuccessful and debt sustainability remains a key issue, or they will be successful in aggressive fiscal tightening and that these economies would slow aggressively and the European Central Bank has to keep interest rates low.
Ongoing concerns about the euro zone stung share prices, pushing the MSCI world equity index <.MIWD00000PUS> down 0.68 percent.
The FTSEurofirst 300 index <.FTEU3> fell 1.4 percent in early European trade, following losses in Asian share markets.
U.S. crude oil fell roughly 1 percent on the day, sliding to a three-month low below $74.
Gold prices, which often rise on risk aversion, edged up on Friday, staying near a record high of $1,248.15 hit on Wednesday.
The June bund future rose 39 ticks to 126.25.
Investors' anxiety toward riskier assets has been reflected in the movement of cash between markets this week.
Money market funds, perceived to be among the least risky investments, attracted new money this week for the first time since January as investors moved back into cash, data from EPFR Global showed.
At the same time, the amount of money pulled from risky, high-yield bond funds hit a five-year high, while equity funds in emerging markets also suffered.
(Additional reporting by Koh Gui Qing in Sydney; Editing by Kevin Liffey)