The euro hit a 3-1/2-month low on Friday as news of JPMorgan's trading losses from a failed hedging strategy spooked investors and lent support to the safe haven dollar, with stop-loss selling adding to the euro's drop.

The euro also remained vulnerable due to a political deadlock in Greece, which has left investors fretting over the risk of Greece exiting the euro zone and fanned worries that the region's debt crisis may worsen.

'The issue is no longer whether Greece will default or not, but whether or not it will leave (the euro zone),' said Daisuke Karakama, market economist for Mizuho Corporate Bank in Tokyo.

'If that were to happen, investor confidence in euro- denominated assets in general may waver, and it could cause market players to wonder whether such assets are suitable to be held as foreign reserves,' he added.

The euro may stay stuck below $1.30 for a while, Karakama said, adding that the single currency could also be headed for a drop below 100 yen over the next month.   

The euro fell to $1.2905 on trading platform EBS at one point, its lowest level since late January, with stop-loss selling adding to its drop. After trimming some losses, the euro stood at $1.2916, down 0.1 percent on the day.

Traders said a near-term focal point was whether a euro option barrier said to be at $1.2900 would hold or not. Adding to the negative tone, Chinese industrial production weakened sharply in April as investment slowed to its lowest level in nearly a decade, and well below forecasts.        
Both the dollar and the yen, safe haven currencies that tend to strengthen in times of market stress, rose against the euro, which fell 0.3 percent to 103.11 yen, closing in on a three-month low of 102.76 yen hit earlier this week.

Traders said the euro came under renewed pressure as investors shunned risky assets and currencies after JPMorgan Chase & Co said on Thursday that it suffered a trading loss of at least $2 billion from a failed hedging strategy.

'The question is how many other banks will follow,' said a trader for a major Japanese bank in Singapore. 'I personally don't think the issue ends here with JPMorgan,' he said.

The Australian dollar eased 0.3 percent to $1.0027, sagging on China's industrial output data. It fell to $1.0018 at one point, its lowest level in nearly 5 months. The Aussie dollar is sensitive to news from China, Australia's largest export market. - Reuters