Euro steady after Portugal rating slashed

2011-07-06 09:39

Tokyo - The euro recovered slightly against the dollar in Asian trade on Wednesday after sliding in the wake of a Moody's downgrade of Portugal to junk status, tempering optimism over progress on eurozone debt.

The euro fetched $1.4450 from $1.4418 late in New York on Tuesday, compared with levels above $1.45 Monday.

It was at ¥116.90, down from ¥117.32 on Tuesday.

Against the Japanese currency, the dollar bought ¥80.89 from ¥81.10.

The euro was supported by investors who remain optimistic about recent progress to resolve European debt problems despite Portugal's ratings setback, a senior dealer at a major bank in Tokyo said.

The single currency fell sharply overnight in the minutes after Moody's Investors Service slashed Portugal's credit rating by four notches to Ba2 from Baa1 and warned that it could be lowered further.

The agency said its main concern was that Lisbon would require a second bailout, just as Greece now does, and that private sector creditor banks would have to take some of the pain.

It warned European banks could face losses if they agree to roll over their Greek debt to give the embattled nation more time to organise its finances, as is being proposed by European officials.

Ratings agency moves, including earlier warnings from Standard & Poor's that current plans for a second Greek bailout constitute an effective default and a Moody's warning on local government debt in China, hit risk sensitive currencies such as the euro on Tuesday.

"It's apparent there's still a lot of water to pass under the bridge in Europe and the water is murky at that," Christopher Gore, currency analyst at GoMarkets in Melbourne, told Dow Jones Newswires.

After Greece passed tough austerity measures, eurozone finance ministers authorised the next €12bn tranche of last year's European Union-International Monetary Fund bailout over the weekend.

The move had eased concerns about a potential cascade of problems tearing through the eurozone and the global economy, but positive sentiment has since faded.

Attention was now shifting to the European Central Bank's rate-setting meeting on Thursday and key US jobs data Friday with "a hike by the (ECB) fully priced in" said Credit Agricole in a client note.

The ECB is expected to raise interest rates for the second time this year, by 0.25 percentage points to 1.5% in a bid to curb inflation.

The dollar was weaker against other Asian currencies, falling to Sg$1.2264 from Sg$1.2271 on Tuesday, to 1 064.30 South Korean won from 1 066.15 and to Tw$28.76 from Tw$28.78.

The unit also eased to 8 531.75 Indonesian rupiah from 8 536.75, to 42.84 Philippine pesos from 43.09 and to 30.45 Thai baht from 30.49.