The European currency fell to $1.4444, its lowest level since June 1, as politicians tried to settle on a compromise plan to shoulder the burden of Greek debt.
As German politicians this week pushed for the private sector to participate in a roll-over of Greek sovereign bonds, ECB president Jean Claude Trichet reiterated the bank’s opposition to the plan and signalled that it would not take part.
“Germany is pushing for some sort of private-sector give-up, but the ECB is worried over the impact on the banking system,” said Kiran Kowshik, a currency strategist at BNP Paribas in Mumbai. “Given the political situation, the ECB is unlikely to go crazy raising interest rates any time soon.”
Governments are trying to reach agreement on a new aid package for Greece before an EU summit on June 23-24.
The ECB kept its key interest rate on hold at 1.25% on Thursday and signalled that it would continue with its monetary policy normalization in July.
Trichet said the bank would remain "strongly vigilant" on inflation. However, in a sign that the speed of rate rises might slow, he said inflation would fall below 2% and that there is no commitment to rate hikes ahead of time.
Euribor futures rose, with the price of the three-month contract maturing in March 2012 rising 0.050 to a record high of 98.080, showing investors paring bets on the pace of rate increases by then.
The euro has gained against the dollar in recent weeks amid expectations that European interest rates would rise faster than their US counterparts, and with European bonds offering higher real yields than US Treasuries, attracting money from dollar-holding investors such as oil exporters and Asian central banks.
US equity futures dipped early on Friday, after Asian equities declined, reversing a rise on Thursday that had ended six straight days of losses.
“It’s a nervous market and that is making trading choppy,” says Michael Turner, a strategist a RBC Capital Markets in Sydney. “Investors are trying to judge just how slow growth is going to be.”
The yen rose against the dollar, trading as high as 80.07, compared with 80.40 previously.