FOREX-Dollar down on Moody’s warning, euro at 1-month high

* Dollar struggles on weak U.S. data and Moody’s comments

* Euro recovers from record low vs Swiss franc

NEW YORK (Reuters) – The euro touched a one-month high against the dollar on Thursday after Moody’s Investors Service said there is a very small but rising risk of a short-lived default by the United States if there is no increase in the statutory debt limit in coming weeks.

Moody’s said in a statement that if there is no progress in increasing the debt limit, it would expect to place its Aaa sovereign credit rating on review for a possible downgrade.

The euro had already extended gains against the dollar, helped by a Reuters report that euro zone officials had agreed in principle on a new three-year adjustment program for Greece that would involve increased external funding.

Earlier reports that Greece had agreed to new deficit cutting measures also allayed fears over its debt crisis, causing investors to shift focus to the U.S. economy.

“Moody’s threat to downgrade U.S. debt certainly doesn’t help the dollar,” said Kathy Lien, director of currency research at GFT Forex in New York. “Moody’s downgrade adds pressure on congressional leaders to work hard at reaching an agreement to increase the debt ceiling.”

Lien added that Moody’s is still lagging behind S&P in rating actions and threats.

“Putting a country’s rating on review is also not the same as a downgrade,” she said. “An actual downgrade is still an unlikely scenario.”

The euro was last up 1.1 percent at $1.44838, having risen as high as $1.4515 on electronic trading platform EBS.

“The euro is rallying as comfort over a near-term outcome for Greece improves and the market refocuses on problems in the U.S. economy,” said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto. “A key psychological level is $1.45. The euro and dollar are in an ugly dog contest and the euro is winning right now.”

Greece has agreed to 6.4 billion euros in new measures to cut its 2011 budget deficit and aims to wrap up bailout talks with international inspectors by Friday, a senior government official told Reuters on Thursday.

Traders said option barriers rolling off this month are layered up to $1.4700.

DISAPPOINTING DATA

A recent spate of disappointing U.S. data, ranging from factory activity to the labor market, has darkened the U.S. economy’s outlook and made the dollar less appealing than higher-yielding currencies.

The data coincides with worries about the end of the Federal Reserve’s second round of quantitative easing later this month. Known as QE2, the $600 billion asset purchase program was launched to stimulate the economy. Investors fear its removal could hinder recovery.

The U.S. Labor Department’s non-farm payrolls report on Friday is a key monthly driver of financial markets. Payrolls likely increased by 150,000 in May, according to a Reuters poll.

New U.S. claims for unemployment benefits fell by 6,000 last week to a seasonally adjusted 422,000.

“Jobless claims were not horrible, but it is still above 400,000, which is certainly a negative,” said Scotia’s Sutton. ”There is a lot of hesitancy ahead of tomorrow’s nonfarm payrolls report. Every indication we have had so far points to a slightly softer labor market in the U.S.”

 

The euro was last trading up 1.1 percent at 1.22001 francs on EBS, pulling away from its record low of 1.2053 francs struck earlier in the global trading day.

The U.S. dollar remained little changed against the safe-haven Swiss franc and was last at 0.8423, above a record low of 0.8383 struck on Wednesday on EBS.

The dollar index was down 0.5 percent at 74.326 after earlier falling to a one-month low of 74.228. The dollar was little changed at 80.88 yen .