| NEW YORK
NEW YORK The euro dropped to a two-month low against the U.S. dollar on Friday and could extend losses further as fears mount that the euro zone's debt crisis and deteriorating economic conditions could drag down global economic growth.
The U.S. dollar and the yen advanced, while the Australian dollar weakened, as investors shed growth-linked currencies in favor of safe havens.
Growth in Germany, Europe's largest economy, is likely to slow in the fourth quarter and the first three months of 2013, the Economy Ministry said. Industrial production in France, Europe's second-largest economy, shrank in October and the country's central bank said it expected to slip into recession at the end of 2012.
"It's the core Europe now, not just the peripheral Europe, that may be sliding into a recession," said Boris Schlossberg, managing director of FX Strategy at BK Asset Management in New York. "If that happens, then China will lose its export market and the whole global economy will begin to contract."
"The market is really afraid that Europe could drag the whole global economy down."
The euro fell as low as $1.2688 on Reuters data, the weakest since September 7, and was last down 0.27 percent at $1.2710. It also hit a one-month low of 100.38 yen and was last down 0.32 percent at 100.94 yen.
Traders said the euro could target the 100-day moving average around $1.2636 and the September 7 low of $1.2625.
"There has been a rather poisonous cocktail that is dragging the euro down with weak European numbers today and renewed fears of the euro zone crisis with Greece back on the agenda," said Arne Lohmann Rasmussen, head of FX strategy at Danske markets.
"We would not be surprised if we saw the euro drop to the $1.25 level within the next three to four weeks."
Investors were also nervous ahead of a Greek vote on Sunday on the country's 2013 budget, the next big hurdle towards unlocking access to urgently needed international aid after Wednesday's tight vote in favor of an austerity package worth 13.5 billion euros.
However, euro zone finance ministers were unlikely to sign off on the next tranche of aid for Greece at a meeting on Monday, according to a senior EU official.
Uncertainty over whether Spain will apply for financial aid also cast a shadow over the euro. Such a move would allow the European Central Bank to buy its bonds and lift the euro.
Spain has so far resisted asking for aid. The prospect of ECB support has driven its borrowing costs down and it has met its 2012 bond issuance target.
"We are looking at a game of chicken between Spanish Prime Minister Mariano Rajoy and the bond markets for looking at a bailout," said John Hardy, FX strategist at Saxo Bank.
As the euro wilted, the dollar's index against a basket of currencies .DXY rose 0.30 percent to 81.037, having earlier risen to 81.087, a two-month high.
Worries over a looming "fiscal cliff" for the United States, which could trigger tax rises and spending cuts if unresolved, was likely to prompt investors to buy the safe-haven dollar.
But for now, Europe remains a bigger worry, some analysts said.
"I think everybody understands and appreciates that if there won't be any kind of a compromise, there will be some sort of a delay," BK Asset Management's Schlossberg said, referring to the U.S. fiscal cliff.
U.S. President Barack Obama, fresh from his re-election victory over Republican candidate Mitt Romney, called on the U.S. Congress to meet with him next week to work out a compromise budget plan to avoid the "fiscal cliff."
Obama insisted any plan would require a tax increase for the very rich while John Boehner, the Republican Speaker of the House of Representatives repeated his party's commitment not to raise anyone's tax rates as part of a deal to address the fiscal crisis.
The dollar fell to a three-week low of 79.06 yen, before recovering to 79.42 yen, little changed on the day.
Data showing U.S. consumer sentiment rising to its highest level in more than five years boosted stocks and Treasury yields, helping the dollar rebound against the yen.
The Australian dollar lost 0.11 percent to $1.0388.
The Swedish crown weakened against the euro and the dollar as industrial output saw its largest fall for more than three years. Analysts said this raised expectations of a rate cut in December.
(Additional reporting by Daniel Bases; Editing by Diane Craft)