* Euro on pace for worst week since early January
* Euro down sharply vs yen
* ECB executive board member Stark resigns
* Little expected from G7 communique
(Updates prices, adds quotes, byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, Sept 9 (Reuters) - The euro fell to its lowest in more than six months against the dollar on Friday as risk aversion increased after news an ECB executive board member will resign in protest over the bank's bond-buying program.
Losses in the euro could accelerate in the coming weeks given ongoing sovereign debt uncertainty and the European Central Bank's shift to a neutral bias amid lower growth forecasts. Money markets have consequently priced in a rate cut from the ECB by year-end.
News of ECB Executive Board Member Juergen Stark's resignation over the bank's purchases of peripheral bonds caught most investors by surprise. The ECB has been buying government debt of highly-indebted euro countries such as Italy, Spain, and Portugal to help shore up these nations' finances. For more see [ID:nL5E7K91Q9] and [ID:nL5E7K91CF].
"The market has been euro-focused today because of all the negative headlines and we have been bearish on the euro since June," said Tom Fitzpatrick, chief technical strategist at CitiFX in New York.
"I wouldn't be surprised if the euro hits $1.35 over the next week or two and $1.30 by the end of the year. It would be a struggle to get back above $1.40."
The euro was also hurt by rumors Greece could default this weekend, a speculation that was quashed by Greek finance minister on Friday. See [ID:nL5E7K92JI].
News in Europe overshadowed U.S. President Barack Obama's proposed $447 billion jobs package on Thursday night, although there was a brief trading flurry early in the Asian session following his speech.
Some investors though were skeptical that Obama's package on jobs, made up largely of tax cuts for workers and businesses, can sail smoothly through a divided Congress [ID:nN1E78800M].
The euro fell as low as $1.36268 on electronic trading
platform EBS
The euro zone's common currency was on pace for its largest weekly loss since early January.
REDUCING EURO HOLDINGS
One of the euro's early supporters among fund managers have started to scale back their holdings of the currency such as Palo Alto, California-based Merk Investments, with more than $850 million in assets.
Merk said it sold over $90 million worth of euros late on Thursday to reallocate to the Australian dollar. The firm though remained positive on the euro in the long term and believed that euro zone concerns should primarily be played out in the pricing of the bond market nit the currency.
Against the yen, the euro fell to a low of 105.300 yen, the
lowest since at least mid 2004, the earliest EBS data available
at Reuters, before recovering to 105.419 yen, down 2 percent on
EBS
On Reuters data, the euro dropped to 105.27 yen, the lowest since July 2001.
Against the Swiss franc, the euro was down 0.7 percent at
1.20702 francs
"This is all coming at exactly the wrong time," said Win Thin, senior currency strategist at Brown Brothers Harriman. "If we break $1.3659 -- that's a big retracement level of the move this year -- then you're looking at $1.2867."
The focus now shifts to a meeting of G7 finance ministers in France on Friday though few are expecting any groundbreaking agreement on steps to ease fiscal problems in the euro zone.
G7 officials are considering issuing a communique after their talks, a G7 source said, and if they did it would talk about the global economic slowdown, financial market turmoil and the policy tools different countries could use, but it would not make any reference to concerted intervention [ID:nP6E7GQ01K].
The ICE dollar index <.DXY> rose to six-month highs of
77.276, helped largely by the euro's fall. Against the yen, the
dollar edged up to a one-month high of 77.860 yen
(Additional reporting by Nick Olivari: Editing by Diane Craft)