NEW YORK (Reuters) – The euro declined to a 18-month low against the dollar on Friday on growing worries that deep government spending cuts in the euro zone would stifle a fragile recovery.

After climbing close to $1.31 following last weekend’s agreement of a $1 trillion emergency rescue package, the euro has come under renewed pressure as focus shifted to the impact on growth from fiscal tightening in countries like Greece, Spain and Portugal.

Expectations have grown that the euro zone’s fragile economies will force the European Central Bank, which started buying the region’s government bonds this week, to keep interest rates low for a prolonged period of time.

“There’s continued pessimism on the euro,” said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston. “There are still a lot of doubts about how European policy makers will be able to successfully maintain the regional growth story.”

In mid-morning trading in New York, the euro was down 0.7 percent at $1.2439. It had earlier fallen as low as $1.2421 EUR= on electronic trading platform EBS, the lowest since November, 2008.

Traders said aggressive selling by macro hedge funds and large option-related stop-loss orders at $1.2499 and $1.2450 accelerated the currency’s slide, adding that the next key level to watch is the October 2008 low around $1.2330.

The euro’s slide set it on track for a loss of about 2.5 percent this week. It has fallen more than 13 percent against the U.S. dollar this year, making it the biggest loser among major currencies.

“Interest rate differentials moved against the euro as the ECB started buying bonds and markets have priced out interest rate hikes. That’s driving the euro lower,” said Marcus Hettinger, global FX strategist at Credit Suisse in Zurich.

UBS lowered its forecast for the euro/dollar to $1.15 by the end of this year and $1.10 by the end of 2011.

The single euro zone currency also lost 1.6 percent to 114.21 yen EURJPY=, while it held steady at 1.4015 Swiss francs EURCHF=, near Thursday’s all-time low, with investors wary of potential Swiss National Bank intervention.

Against the yen, the dollar fell 0.9 percent to 91.84 yen JPY=.

The ICE Futures U.S. dollar index, which tracks the value of the greenback versus a basket of major currencies, hit a one-year high at 85.941 .DXY.

The dollar and yen both benefited from safe-haven demand as euro zone debt woes heightened uncertainty about the global economy and overshadowed positive news on the U.S. consumer front.

U.S. consumer sentiment edged up in early May from April, while retail sales rose more than expected in April. Separate data showed a continuing expansion of industrial activity. For more, see [ID:nN14138390] (Editing by Theodore d’Afflisio)

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