Tuesday, 6 December 2011

Euro falls as S&P warning weighs ahead of summit

Euro notes are seen at the Belgian Central Bank in Brussels October 26, 2011. REUTERS/Thierry Roge

(Reuters) - The euro fell against the dollar for a third straight day on Tuesday, surrendering earlier gains, as investors remained focused on Standard & Poor's euro zone downgrade warning.

Rating agency S&P on Monday placed its long-term sovereign ratings on 15 euro zone countries on CreditWatch negative, which normally means a chance of downgrade within three months.

The warning, which including top-rated Germany and France, came as the two countries announced an initiative, to be discussed at a Friday summit, to impose budget discipline across the euro zone through treaty changes.

Analysts said the warning has put European Union leaders under additional pressure to produce quick results to stabilize markets and regain confidence. If core euro zone nations are downgraded, the European rescue fund will find it tough to attract investor interest in its bond offerings, they said.

"The euro tumbled yesterday on that S&P warning, and we are continuing to see that negative momentum in early New York trade," said John Doyle, currency strategist at Tempus Consulting in Washington.

The euro was down 0.3 percent at $1.3365, with the session low at $1.3332, according to Reuters data.

It had touched a high of $1.3427 after German industrial orders for October posted their strongest rise since March 2010. Traders expect offers between $1.3430-50 to cap potential gains.

"S&P generally does not inform us of anything the markets have not already figured out," said Jeffrey H. Bergstrand, a finance professor at the University of Notre Dame's Mendoza College of Business. "This will impact the markets a little, but only transitorily. I expect some selloff of the euro Tuesday, but little sustained impact."

Steve Barrow, head of G10 currency research at Standard Bank in London, said he did not expect the countries to be downgraded by S&P and the EU summit was likely to see some sort of agreement.

"But there is a low tolerance level for investors to build positions especially with an ECB meeting coming up and then the year-end plays," he said.

Until the S&P warning, the euro had received some support on growing expectations of an agreement at the EU summit on December 9, along with deficit-reduction steps by debt-laden countries like Italy. That is expected to pave the way for the European Central Bank to move more aggressively to calm the turbulent euro zone bond market.

The bank has so far been reluctant to buy bonds of heavily indebted states, concerned this would take the pressure off them to sort out their finances, but signaled it may change its stance, depending on what EU policymakers produce.

Still, any bounce is likely to be limited to short-covering, and levels around $1.3550 should offer resistance. Traders said positioning is also likely to be light, heading into a ECB rate decision on Thursday.

The euro rose against the Swiss franc after data showed a growing risk of deflation in Switzerland and added to speculation the Swiss National Bank could intervene and raise the floor on the euro/Swiss franc pair from 1.20 francs.

The single currency rose to its highest against the franc since November 17, while the dollar rose around 0.7 percent to a high of 0.9270.


The ECB is widely expected to cut interest rates and throw more funding lifelines to stressed banks toiling against the euro zone's debt crisis. Most banks expect the ECB to cut by 25 basis points, with less than a 10 percent chance of a 50 bps cut, a Reuters poll found.

A deeper-than-expected cut could give the euro and other riskier currencies a brief lift, analysts said.

Against the yen, the greenback was 0.1 percent higher at 77.77 yen, again struggling to break the 78.00 yen barrier.

The Australian dollar fell 0.7 percent after the Reserve Bank of Australia cut rates by 25 basis points and left the door open for further easing.

(Reporting by Nick Olivari; additional reporting by Anirban Nag in London; editing by Jeffrey Benkoe)