Reuters: US Dollar Report: FOREX-Euro falls as Spain debt worries mount

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FOREX-Euro falls as Spain debt worries mount Jun 8th 2012, 11:45 Fri Jun 8, 2012 7:45am EDT * Euro retreats after Spanish rating downgrade * Weak Italian, German economic data adds to gloom * Lack of policy action from Fed hits riskier currencies * Spain expected to request aid package at weekend: sources By Nia Williams LONDON, June 8 (Reuters) - The euro fell on Friday after a three-notch downgrade to Spain's credit rating and signs of economic weakness in Italy and Germany, leaving it vulnerable to further falls as concerns ratchet up about a deepening euro zone debt crisis. European Union and German sources told Reuters Spain was expected to make a request over the weekend for an aid package to prop up its troubled banks, highlighting the vulnerability of the country's financial sector. Rating agency Fitch slashed Spain's credit rating on Thursday, leaving it just two notches short of junk status. It signalled further downgrades could come as the country tries to restructure its troubled banking system. "The euro issue is a major one and Spain is in a serious problem. It will remain so until a proper solution is found," said Dieter Merz, chief investment officer of Switzerland's MIG Bank. "The euro is in a danger zone and in this environment the dollar will gain. We see it easing to around $1.18-$1.20 by the end of September." The euro fell 0.8 percent to a low of $1.2446, retreating from a two-week high of $1.2625 hit on Thursday after a surprise interest rate cut by the Chinese central bank. More losses would leave the euro vulnerable to a test of the 23-month low of $1.2288 hit on June 1, after failing to break above chart resistance at $1.2626, the January low. The euro also took a knock after Italian industrial production fell far more than expected in April and German imports tumbled at their fastest rate in two years, adding to euro zone recession concerns. The euro briefly came off its lows after China said it would cut fuel prices by nearly 6 percent from Saturday, which some traders saw as another positive step that may help stimulate China's economy. But some analysts were concerned that by cutting rates on Thursday China might have been looking to pre-empt grim news from Chinese data due out over the weekend. "The news with the easing measures in China would normally be positive for risk assets but the market is cautious," said Ian Stannard, currency strategist at Morgan Stanley. "Below $1.2290 would leave $1.20/$1.19 in view, but the euro could get some positive surprises on the way that could lead it back up to the $1.26/$1.27 area." The euro was on track for its first weekly gain after 5 straight weeks of losses. EURO WORRIES Many analysts said the euro could come under further pressure next week as attention refocuses on political turmoil in Greece before an election on June 17. A victory for anti-bailout parties would raise the possibility of Greece leaving the currency union. The euro fell 1.3 percent against the yen to 98.55 yen. The safe-haven Japanese currency gained broadly as market sentiment soured, with the dollar losing 0.5 percent to 79.27 yen. Perceived riskier currencies were also under pressure after U.S. Federal Reserve Chairman Ben Bernanke offered no hints of imminent monetary stimulus in his testimony to Congress on Thursday, wrongfooting some market players who had positioned for a dovish statement. "The recovery (in the euro) we saw in the last few days was not a sustainable one," said Lutz Karpowitz, currency strategist at Commerzbank, who forecast the euro would be around $1.20 by the end of June. The dollar index rose 0.9 percent to 82.775, recovering from a 10-day low of 81.911 hit on Thursday. The higher-yielding Australian dollar slipped 0.6 percent against the U.S. currency to US$0.9839. Link this Share this Digg this Email Reprints

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