Euro still downcast; Aussie focused on CPI

A picture illustration shows a 100 Dollar banknote laying on one Dollar banknotes, taken in Warsaw, January 13, 2011.

SYDNEY (Reuters) - Investors continued to give the euro and risk currencies a wide berth on Wednesday following a selloff in global stocks as worries about the euro zone debt crisis festered.

EU officials said Greece had little hope of meeting the terms of its bailout, while Spain's borrowing costs jumped to painfully high levels, fuelling fears for the region's stability.

The euro, which slumped to a fresh two-year low around $1.2042 overnight, was last at $1.2065. It remained on track to test the 2010 trough of $1.1876.

Against the yen, the single currency fetched 94.26, having carved out a new 12-year low of 94.12. The euro, though, managed to recoup lost ground against high-beta currencies like the Australian dollar. It was last at A$1.1804, recovering from a dip to A$1.1729.

Markets reacted cautiously to a Wall Street Journal article saying U.S. Federal Reserve officials were moving closer to taking new steps to spur activity and hiring.

"This is in line with our economist's expectations and we expect that the market moving towards this view to lead to a reversal of the USD's recent rally," BNP Paribas analysts wrote in a client note.

They said based on their fair-value models, the euro looked substantially undervalued across the board following its underperformance in recent weeks.

"We recommend going long EURUSD, targeting a return to fair value of 1.2420 with the stop loss at 1.1870, slightly below the 5 year low of 1.1877," they added.

Delivering yet more bad news for Europe, Mood's changed the outlook on its provisional top-notch rating for the European bailout fund to negative. The action, though, was expected given its move earlier in the week to slap a negative outlook on Germany, the Netherlands and Luxembourg.

With the euro on the backfoot still, the dollar index .DXY remained near a two-year peak of 84.100 set overnight. Against the yen, the greenback traded at 78.17, holding above a 7-week trough around 77.94 set early in the week.

The broadly firmer greenback saw the Australian dollar retreat to a 1-1/2 week low of $1.0211. It is flirting with the lower-end of its uptrend channel drawn from the June 1 low and the 100-day moving average at $1.0195.

The Aussie's near-term outlook hinges on consumer inflation data due at 0130 GMT. Markets expect a very tame outcome, which should leave the door wide open for the Reserve Bank of Australia to cut interest rates again if needed.

(Editing by Wayne Cole)