NEW YORK: The euro headed for its first weekly drop against the dollar and yen in three weeks on Friday as investors refocused on uncertainty about potential European Central Bank action to contain the debt crisis and deteriorating growth in the euro zone.

Weaker-than-expected growth in Chinese exports, which followed disappointing German data earlier this week, stoked concern about global growth. That boosted the safe-haven dollar and yen and pressured commodity-linked currencies such as the Australian and Canadian dollars.

Investors booked profits on a rally sparked by ECB President Mario Draghi, who said the bank would do whatever it takes to save the euro and may buy bonds of stressed countries to bring down borrowing costs.

But after the initial euphoria, markets began to realize that any intervention would depend on troubled countries activating the euro zone's rescue funds first. The permanent ESM fund still needs a green light from the German Constitutional Court, which rules on Sept. 12.

“The resistance of German lawmakers and central bankers to wholesale central bank intervention in sovereign debt markets is likely to result in a watered-down version of any plan by the ECB and is likely to disappoint market participants,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

The euro fell 0.1 per cent to $1.2294, pulling further away from a one-month high of $1.2443 set on Reuters data on Monday. It had earlier hit a one-week low of $1.2239 after breaking support in the $1.2250 level.

It also fell 0.5 per cent to 96.16 yen.

On the week, the euro lost 0.8 per cent against the dollar and 1.3 per cent versus the yen.

Comments from Germany's economy ministry that the country faced “significant risks” linked to the euro zone crisis also weighed on the region's common currency.

Investors also looked ahead to next week's data on euro zone second-quarter economic output, which is expected to show a contraction and is likely to put pressure on the ECB to cut interest rates, a factor that could weigh on the euro.

Despite the euro's fall, implied volatilities are subdued.

The one-month euro/dollar implied volatility traded around 9 per cent, against 10 per cent a week ago. Option traders said that unless the euro broke below $1.2250, volatility would drift lower.

Lucy Lillicrap, senior risk consultant at global payments company AFEX Markets Plc in London, said the euro's downtrend this year may be coming to an end, and a rise to $1.2750 would confirm this view.

“Overall, the markets are willing to give the ECB the benefit of the doubt. The ECB is out there saying it will do something and that in itself is a positive.”

The dollar slid 0.4 per cent to 78.23 yen and was on  track for a loss of 0.5 per cent this week.

Japan's upper house of parliament passed a controversial sales tax bill, a step analysts said could eventually exert pressure on the Bank of Japan to ease monetary policy further in coming months.

The pair has traded in a narrow range of 77.90-78.80 since late July. It hit a three-week peak of 78.79 yen on Thursday, with traders citing exporter orders above 79 yen.

The Canadian dollar weakened, with the greenback rising 0.1 per cent to C$0.9919.

Canada's economy unexpectedly lost 30,400 jobs in July in a third disappointing month for the labor market, indicating tepid growth that will likely keep the central bank on the sidelines for longer.

The Australian dollar fell 0.1 per cent to $1.0568, a day after touching $1.0615, its highest since March 20.

Chinese data showed exports grew just 1.0 per cent in July year-on-year, below expectations for an 8.6 per cent increase.

Imports grew 4.7 per cent, compared with a forecast for a 7.2 per cent rise.

The Aussie dollar also fell after the central bank released its quarterly monetary policy statement, in which it upgraded its 2012 economic outlook but warned a strong currency could constrain growth more than in the past.

The dollar index was down 0.1 per cent at 82.557, having hit a one-month low of 82.041 on Tuesday.

Updated Aug 10, 2012 07:31pm

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