FOREX-Euro down on mounting euro zone risks

Fri Jun 8, 2012 2:48pm EDT

* Euro slumps after Spanish rating downgrade
    * Spain expected to request aid package at weekend - sources
    * Weak Italian, German economic data adds to gloom
    * Euro posts weekly gains of 0.6 percent


    By Gertrude Chavez-Dreyfuss	
    NEW YORK, June 8 (Reuters) - The euro fell against the U.S.
dollar o n F riday after a three-notch downgrade to Spain's credit
rating and signs of economic weakness in Italy and Germany,
leaving the single currency  vulnerable as euro zone risks
increased.	
    Despite Friday's losses, the euro was on track for its best
weekly performance since April 22, posting gains after five
straight weeks of declines. Analysts, however, were convinced
gains would be short-lived as investors sought to square up
ahead of the weekend.  	
    European Union and German sources told Reuters Spain was
expected to ask for an aid package over the weekend to prop up
its troubled banks..	
    Rating agency Fitch slashed Spain's credit rating on
Thursday, leaving it just two notches above junk status. It
signaled further downgrades could come as the country tries to
restructure its troubled banking system. 	
    "We have come to the edge of the cliff. There are so many
issues in Europe now," said Simon Smollett, senior currency
options strategist at Credit Agricole in London. "We're all
waiting for the Greek elections and when that's over, we have
Spain."	
    Last month's Greek election resulted in no party achieving
the 50 percent threshold needed to achieve a majority. Greece
was also unable to form a coalition government, setting up the
next round of elections on June 17.	
    A victory for anti-bailout parties would raise the
possibility of Greece leaving the currency union.    	
    The euro was last down 0.4 percent at $1.2514,
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 $1.2286 hit on June 1, based on Reuters data,
after failing to break above chart resistance at $1.2623, the
January low.	
    The euro also took a hit 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.  	
    But the common currency 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. 	
    The euro fell 0.7 percent against the yen to 99.34
yen. The safe-haven Japanese currency gained broadly as market
sentiment declined, with the dollar losing 0.3 percent to 79.75
yen.	
    But the euro still posted its best week versus the yen since
late February, with a gain of 2.3 percent.	
    "We are now less confident that the euro zone will continue
to muddle through," said global macro hedge fund GLC Ltd in
London. "The countries that need to make the biggest adjustment
have the weakest economies. In addition, austerity fatigue is
spreading."	
    GLC, which manages assets of about $1 billion, has taken
risky trades off the table and even if news out of Europe
improves and the euro spikes as a result, it would look to short
the currency.	
    Currencies with more perceived risk 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, upsetting some market players who had positioned
for a dovish statement. 	
    The higher-yielding Australian dollar was flat on the
day against the U.S. currency at US$0.9895.	
    Thomson Reuters on Friday released its monthly foreign
exchange  trading volumes for May 2012. May average daily volume
was $154 billion, up from $130 billion in April but down from
the $161 billion reported in May, 2011. 	
    ICAP said on Friday that average daily spot FX volumes on
the EBS platform, which competes with Thomson Reuters, were
$130.8 billion for May.
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