Fears of European Slowdown Weaken the Euro

FRANKFURT — The euro tumbled Friday to near the $1.50 mark — its lowest level against the dollar since February — amid new signs that the European economy was slowing.

The decline in the euro helped to send oil prices to a three-month low on Friday in New York trading. Crude oil fell $4.82 a barrel to settle at $115.20 in New York trading.

In Europe, the latest indication of a slowdown came with a report that the Italian economy had unexpectedly shrank in the second quarter, adding to the sentiment that the European Central Bank was now more likely to cut, rather than raise, interest rates at its next meeting.

The euro fell to $1.5004 Friday before rallying slightly, atop a similar slide Thursday. The euro hit a record high of slightly more than $1.60 on July 15, a week after the European Central Bank bucked the trend of the world’s major central banks and raised its benchmark interest rate.

“There’s a real capitulation under way,” David Gilmore, partner at Foreign Exchange Analytics in Essex, Conn., told The Associated Press on Friday. “In 24 hours it’s gone from $1.55 to $1.50, which is highly unusual. That changes your game plan for the marketplace.”

The stronger dollar also helped ease concerns that a conflict between Georgia and Russia could disrupt oil supplies in the Caspian regions.

“Energy demand destruction and the dollar return have formed a quiet alliance to bring the oil market down, and today the louder of the two is the dollar,” Peter Beutel, president of trading consultants Cameron Hanover in New Canaan, Conn., told Reuters.

The dramatic drop was ignited by a warning from the European Central Bank on Thursday that high energy costs and more sluggish global growth were finally taking a toll on the 15-nation euro zone, an economy that had seemed remarkably resistant to the turmoil around it for most of this year.

With inflation probably past its peak, most economists now believe the bank’s interest rate increase of July will be its last for the year, and the bank will begin lowering borrowing costs next year. By then, bank watchers believe, the central bank will have firm evidence that inflation, now running at an annual rate of slightly more than 4 percent, will fall back to its informal target of 2 percent.

Since lower interest rates diminish the appeal of euro-denominated assets, the euro tends to edge downward when the prospect of higher interest rates recedes.

“The currency markets had been rewarding hawkish central banks for most of the year, but as inflation becomes less of a concern that sentiment ebbs,” said Simon Derrick, head of currency research at Bank of New York Mellon in London.

On Thursday, in announcing that the bank would hold rates steady, the president of the central bank, Jean-Claude Trichet, acknowledged that the region’s economy was straining under the pressure of high energy prices and slower global growth.

In part, currency experts believe the recovery of the dollar reflects an inevitable swing back from a phase of acute weakness, when every bit of bad news out of the United States — ranging from the collapse of Bear Stearns in March to the bailout last month of the mortgage lenders Fannie Mae and Freddie Mac — seemed to pound it down further.

“At this point, the dollar has fallen a lot,” said Kenneth Rogoff, a professor at Harvard and former chief economist of the International Monetary Fund. “Going down sharply further would require a real crisis.”

With a history of resilience, the United States economy now looks like it could skirt a recession, while the odds of Europe enduring one, however brief, have risen measurably in the last month.

The Italian economy, chronically stagnant over the last decade, shrank in the second quarter by 0.3 percent, according to the government data.

Another quarter of decline would mark the country’s fourth recession — defined as two consecutive quarters of negative growth — in a decade.

More bad news appears increasingly likely this coming week in the form of data on growth in Germany and the 15-nation euro area.

Many economists believe the German economy, the engine of the region, may have contracted in the second quarter after blazing ahead by 1.5 percent in the first three months of the year. Much of that growth reflected technical factors like construction projects that will not be repeated. But the European Central Bank said Thursday that the fall-off in growth also stemmed from higher energy prices and cooling demand for German exports worldwide.

“Until now, the severity of Europe’s problems have been outweighed by what happened in the United States,” said Stephen Jen, global head of currency research at Morgan Stanley in London.