Euro shaky after mass ratings downgrade, outlook poor

A picture illustration of crumpled kuna, Dollar and euro banknotes, taken in Zagreb January 18, 2011.

SYDNEY (Reuters) - The euro eased in early Asian trade on Monday and looked set to stay under pressure after Standard & Poor's mass downgrade of euro zone countries late last week, including France, dealt the region another setback.

News of the downgrade came as negotiations between Greece and private creditors on a debt swap deal broke down, raising the risk of a messy Greek default. Markets are also worried the euro zone's bailout fund, EFSF, might lose its AAA rating with S&P as well.

Still, the reaction has been relatively muted given the downgrade was well priced in. European Central Bank Governing Council member Ewald Nowotny also said the ECB will do all it can to calm the situation.

The euro stood at $1.2637, having touched a fresh 16-month trough around $1.2624. This compared with $1.2674 late in New York on Friday. Against the yen, it reached an 11-year low near 97.10, before steadying at 97.25 yen.

The common currency also lost ground against the Australian dollar and was hovering just above an all-time low at A$1.2250. On the Swiss franc, it fell as low as 1.2041 francs, creeping ever closer to the SNB's floor of 1.2000.

S&P announced the highly anticipated downgrades just after New York markets closed on Friday. U.S. markets will stay shut on Monday for the Martin Luther King Jr. Day holiday.

"EURUSD has traded south ever since S&P's December 5 negative ratings watch announcement, and we suspect will remain subject to further downward pressure in the coming week," analysts at BNP Paribas said.

"This may have less to do with the fact that the EFSF is now threatened with the loss of its AAA status ... than worries over the fate of the Greek bond swap talks."

Pressure was mounting on Athens to complete a deal with private bondholders to cut its debt to more sustainable levels and convince its international lenders to keep giving it the cash it needs. Without aid, Athens would default in March when it has to redeem 14.5 billion in bonds.

With the single currency on the backfoot, the dollar index .DXY climbed 0.2 percent to 81.677 to be within easy reach of a 16-month peak at 81.784. The greenback also edged up against the yen to 77.00 from 76.93 in New York.

The resilient Australian dollar suffered only a minor setback, slipping to $1.0235 before recovering most of the losses to stand at $1.0294.

"Following Friday's sovereign downgrades, in the coming days we expect a litany of other rating downgrades of related entities," said Laurent Fransolet, analyst at Barclays Capital.

Other ratings agencies, which have a large number of euro zone countries under review, may also announce their decisions in the days ahead.

"Given the propensity of rating firms to announce things after one another, we would expect some further headlines on this in the coming weeks. Indeed Fitch had already announced that it aimed to conclude its 'watch negative' reviews before the end of the month," Fransolet added.

Asian economic data on Monday includes machinery orders from Japan, while key figures on Chinese GDP are out on Tuesday.

(Reporting by Ian Chua; Editing by Wayne Cole)