FOREX-Euro decline pauses but debt worry keeps it vulnerable

* Euro holding just above 11-week lows, more downside seen

* S&P says may cut Portugal’s credit ratings

* Market wants to see more pre-emptive action

By Charlotte Cooper

TOKYO, Dec 1 (BestGrowthStock) – The euro inched up on Wednesday
after a drubbing the previous day but remained near 11-week lows
against the dollar in a market waiting to see what European
policymakers will do next to contain worries about euro zone

The euro suffered yet another setback as Standard & Poor’s
threatened to cut the credit ratings of Portugal, but then
stabilised above the previous day’s low of $1.2969 (EUR=: ), a
level not seen since mid-September.

Still, while small recoveries are not ruled out few expect
that its trials are over, with downside targets now at about
$1.2800 and then its August lows around $1.2600.

The euro was also near 11-week lows against the yen after
falling 1.8 percent on Tuesday, and 10-week lows against sterling
after premiums on Spanish and Italian bonds over German debt rose
their highest in the euro’s lifetime.

Analysts said the market was looking for more pre-emptive
action by policy-makers in the region after a rescue package for
Ireland at the weekend, as pressure in the euro zone bond market
was widening to more countries including Belgium.

“The general feeling is that this is a mess that is not going
to be easily escaped,” said Robert Ryan, a FX strategist at BNP
Paribas in Singapore.


Euro zone debt timeline:

Take a Look on euro debt crisis: [ID:nLDE68T0MG]

Euro zone crisis coverage

Graphic on debt crunch:


Citing uncertainties stemming from the risk of Portugal
having to seek international financial aid, S&P put the
country’s A-minus rating on review for possible downgrade.

S&P’s warning came after Ireland secured an 85 billion euro
($110 billion) bailout package on Sunday, seven months after
Greece was thrown a lifeline to tackle its debt problems.

Markets worry that other debt-ridden euro zone countries such
as Portugal and Spain will also need aid and if so whether the
region can really afford it. Portugal’s prime minister said it is
not facing any pressure to ask for a bailout and does not need
any such help. [ID:nLIS002517]

“You really need some aggressive action from the
authorities in Europe to try and calm nerves and that’s really
the key at this stage,” said Greg Gibbs, a strategist at RBS in

Euro zone’s debt woes are also raising suspicions that
European banks could find it costly to access dollar cash, if not

While dollar interest rates such as three-month LIBOR
(USD3MFSR=: ) have risen only slightly in the past few days,
euro/dollar basis swap spreads have risen sharply in recent weeks
(EURCBS: ) in a possible sign that some euro-zone banks are trying
to raise dollar cash through swaps.

The one-year spread, now over 50 basis points, is above the
peak it hit in the wake of Greek debt crisis in May, though still
far below the peaks after the Lehman Brothers collapse in 2008.

The next event in focus is a European Central Bank meeting on
Thursday that analysts say has taken on added significance as
confidence in the region has deteriorated.

Investors will be looking for comments on how the ECB can help
address growing anxiety in the credit and currency markets, and
Ryan at BNP said the ECB could eventually be forced into making
more government bond purchases.

On Wednesday, though, the euro edged up to $1.3020 after
languishing below $1.3000 for much of the session, with support
at about $1.2795, a 61.8 percent retracement of its June-November
rally, and resistance at about $1.3060.

The euro has fallen 9 percent from its November high of
$1.4283 and shed 7 percent in November alone, the biggest monthly
fall since May.

Momentum indicators such as stochastics signal its fall is
well and truly stretched, building the chance of a rebound, but
chartwise scope for a recovery, at least in the near term, is
seen a limited to $1.3060-$1.3100.

It fell to 108.33 yen (EURJPY=R: ) on Tuesday, a level last
seen on Sept. 15, the day Japan intervened to stem yen strength,
and plumbed a record low versus the Australian dollar at about
A$1.3515 (EURAUD=R: ). It was at 108.65 yen on Wednesday.

The dollar has been a beneficiary of the euro’s problems,
which has helped fuel a retrenchment in investor confidence,
denting higher-yielding currencies such as the Australian dollar.

The dollar index (Read more about the global trade. ) (.DXY: ), which tracks the greenback’s
performance against a basket of other major currencies, rose to
its highest since Sept. 20 on Tuesday at 81.444 and was stable on
Wednesday just below its 200-day moving average of 81.78.

The yen has fared the best in the past 24 hours as investors
have unwound yen-funded positions in higher yielding currencies
and Japanese exporters bought the yen.

The dollar dipped to 83.38 yen (JPY=: ), its lowest level in a
week and retreating a full yen from a two-month high of 84.41 yen
hit on Monday.

The rise in the yen has prompted Japanese margin traders —
known collectively to be contrarian — to increase their net
yen-selling positions to near a record high, putting a brake on
the yen’s rise. [ID:nTOE6B0026]

Meanwhile the Australian dollar dipped to its lowest since
late September at $0.9536 after Australian GDP data showed the
economy grew less than expected in the third quarter and
suggested there was no urgency for the central bank to tighten
interest rates again soon. [ID:nSGE6AT0FR]

The Aussie was at $0.9593 (AUD=D4: ), up 0.1 percent.
($1=.7706 Euro)
(Additional reporting by Ian Chua in Sydney, Hideyuki Sano in
Tokyo and FX analysts Krishna Kumar in Sydney and Rick Lloyd in
Singapore; Editing by Michael Watson)

FOREX-Euro decline pauses but debt worry keeps it vulnerable