NEW YORK – The euro sank to a 14-month low near $1.28 Wednesday as a potential downgrade of Portugal's debt underscored fears that a massive bailout for Greece won't be enough to halt the debt crisis in Europe.
In the U.S., however, the government said stronger economic growth means it can cut its borrowing from record levels. The Treasury plans a smaller auction for next week, compared to its last auction in February, for the first time since 2007.
The euro sank as low as $1.2805 in morning trading in New York, its weakest point since March 2009. In afternoon trading, the euro was worth $1.2872, down from $1.3004 late Tuesday.
On Wednesday, Moody's Investor Services said it may cut Portugal's debt in the next three months. The credit ratings agency said Portugal's rating could fall by one or two notches. Standard & Poor's last week lowered Portugal's credit rating.
Borrowing costs in Portugal and Spain soared on Wednesday. Markets are increasingly worried that, like Greece, the two countries may not have the money to repay debts as their economies remain weak, and will need bailouts.
Greek politicians and European officials had hoped that the euro110 billion bailout for Greece, now worth about $142 billion, would reassure investors. But markets remain concerned about Greece's ability to emerge from its debt problems in the long term as budget cuts and higher taxes weigh on economic growth. Three people died during massive riots against austerity measures in Athens, signaling the difficulty the Greek government will have in implementing the service and pension cuts necessary to bring down its debt.
Swelling public debt and the fear of national debt defaults in Greece, Portugal and other countries using the shared European currency have driven the euro down from just above $1.50 late last year.
The situation could result in a breakup of the European monetary union, with countries such as Greece, Italy, Spain and Portugal leaving the euro, said David Rosenberg, economist at investment firm Gluskin Sheff, in a research note.
The dollar is the beneficiary of troubles in Europe and with the euro because of its perceived safety. The dollar is also gaining as the economic outlook brightens in the U.S. On Wednesday, the Institute for Supply Management, a trade group, said business acticity in the service sector expanded in April at the strongest pace in four years.
The Treasury said it planned to sell fewer notes next week than in its previous auction in February, which raised a record $81 billion. The government plans to raise $78 billion next week. It's the first time the Treasury has reduced its borrowing since 2007. The government said it is able to cut its borrowing because the stronger economy is boosting tax revenue.
As the economy recovers, the Federal Reserve will be more likely to raise interest rates, which would help boost the value of the dollar.
In other afternoon trading in New York, the British pound dropped to $1.5119 from $1.5165. The dollar also rose to 1.1127 Swiss francs from 1.1018 francs, and gained to 1.0274 Canadian dollars from 1.0252 Canadian dollars.
The U.S. currency slipped to 94.14 Japanese yen from 94.38 yen