FOREX-Euro snaps six-day advance as Moody's cuts Portugal

Tue Jul 5, 2011 2:36pm EDT

Related Topics

* Moody's cuts Portugal's credit rating to junk

* Weak euro zone data, China lending concerns weigh

* Greece worries still in the background

* Euro losses seen capped ahead of ECB meeting (Updates prices, adds details, adds quote)

NEW YORK, July 5 (Reuters) - The euro slid against the dollar and the Swiss franc on Tuesday, snapping six straight days of gains, after Moody's cut Portugal's credit rating to junk.

Weak euro zone data and concerns on China had already weighed on risk sentiment and boosted safe-haven currencies. Concerns about Greece have not faded despite the approval of 12 billion-euro loan by euro zone finance ministers, and the Moody's downgrade of Portugal only added to risk aversion.

Moody's Investors Service cut Portugal's credit rating by four levels to Ba2, two notches into junk territory, saying there is great risk the country will need a second round of official financing before it can return to capital markets. For details, see [ID:N1E764185]

"This renews the question of whether or not just Greece but the other peripherals are likely to need more bailouts," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. "These issues were not extinguished last week. There was a nice dose of water poured on them, but they are still smoldering, and this is like adding gasoline to those smoldering ashes."

The euro dropped 1.7 percent against the safe-haven Swiss franc EURCHF=EBS to a low of 1.21150, francs, pulling back from a five-week high touched on Monday on trading platform EBS.

The euro was down around 0.8 percent against the dollar at $1.44267 EUR=EBS on EBS, taking a breather from recent gains made after Greece approved tough austerity measures last week. The euro had gained more than 2 percent against the greenback last week in its best weekly performance since January.

On Monday the euro hit a one-month high versus the dollar at $1.45800.

Traders cited talk of stops through $1.44400-$1.44500 ahead of bids $1.44300/$1.44350.

The Portuguese credit ratings cut followed another setback for Greece on Monday when ratings agency Standard & Poor's warned it would treat a rollover of privately held Greek debt, now being discussed, as a selective default. [ID:nL6E7I408N]

Greece also needs a second aid package worth some 110 billion euros, which euro zone finance ministers said would be made final by mid-September.

Falls in the euro accelerated after the Markit Eurozone Purchasing Managers' Index showed growth in the euro zone's dominant services sector slowed to its weakest pace since October.

Euro zone retail sales data was also lower than forecast. [ID:nL9E7I4005] [ID:nLDE7640H3]

One factor capping losses in the euro was Thursday's ECB policy meeting, An ECB rate increase has been well factored in by the market, analysts said.

Price moves post meeting will hinge on the language that ECB President Jean-Claude Trichet uses at his news conference after the formal announcement, with investors focused on what he says about inflation.

"Dropping the reference to 'strong vigilance' would signal a short pause at least in the tightening cycle and likely see the euro rally fade again," said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

Earlier, Chinese media reports about a possible rate rise in China this weekend and a report by rating agency Moody's saying the scale of problem loans to local governments in China may be much bigger than previously thought also hurt risk appetite, lifting the dollar as well. [ID:nL3E7I507Y] (Reporting by Nick Olivari and Gertrude Chavez-Dreyfuss; Additional reporting by Steven C Johnson; Editing by Kenneth Barry)

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