The euro hit a six-week low against the dollar Friday, heading for a third straight week of losses, after the European Central Bank said banks will repay less than half the expected amount of loans and on uncertainty about Italy's election.
The yen dropped against the dollar and euro, with many investors forecasting further weakness as the Bank of Japan looked set to ease monetary policy further to fight deflation.
Banks will repay 61.1 billion euro ($80.8 billion) of the second round of the ECB's three-year loans next week, far below the 130 billion euro in repayments expected by the market. The smaller amount suggested many banks are still dependent on the ECB.
"The smaller-than-expected payback of loans means the ECB's balance sheet will shrink at a slower-than-expected pace," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. It "further undermined confidence in the state of recovery in the 17-member bloc."
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The euro fell as low as $1.3144, its lowest since Jan. 10, retreating from a session high of $1.3244 after the German Ifo survey showed a big jump in business morale in Germany, suggesting a brighter outlook for the euro zone's largest economy.