Dollar extends gains on worries over debt plans and tepid growth in UK, countries using euro

Dollar gains on European economic worries

NEW YORK — The dollar moved higher against the euro and the pound Wednesday on concerns about the nearly $1 trillion financing package for euro countries and the new British government’s plan to reduce its debt.

The euro dropped to $1.2631 in late trading in New York Wednesday from $1.2694 late Tuesday.

The euro has been under pressure because of fears that Greece’s financial woes will drive up borrowing costs and perhaps lead to default by other indebted euro countries such as Portugal. The debt problems led some to speculate that some of the 16 countries using the common currency could leave the monetary union.

The euro surged to $1.31 on Monday following the weekend’s news of the €750 billion loan deal for countries using the euro. Doubts about the costs of the aid package and growth prospects in Europe have wiped out the euro’s gains since then, however.

The economy of the 16 countries using the euro grew by a modest 0.2 percent in the first quarter.

The low-cost debt arrangement, cutbacks in government spending by indebted countries and bond purchases by the European Central Bank will weigh on the euro in the medium term, said UBS analyst Geoffrey Kendrick.

On Wednesday, European Union officials proposed big fines for governments who don’t cut down on debt.

The British pound also fell, dropping to $1.4821 from $1.4959. Britain’s new government, led by Conservative Prime Minister David Cameron in a coalition with Liberal Democrats, said on Wednesday it would move quickly to pare Britain’s deficit, but details are still scarce.

The Bank of England said inflation would remain muted, meaning it won’t have to raise interest rates for some time. Bank of England Governor Mervyn King said the economic outlook for the U.K. faced “greater downside risks” due to the recent financial turmoil, and that the pace of the recovery would be “dampened” because of cutting the deficit.

Raising interest rates tends to boost a currency.

In other trading in New York, the dollar rose to 93.21 Japanese yen from 92.77 yen. The dollar also edged up to 1.0198 Canadian dollars from 1.0190 Canadian dollars, and gained to 1.1102 Swiss francs from 1.1099 francs.