FOREX-Euro falls as worries over Spain, growth dent risk appetite

Wed Oct 10, 2012 11:10pm EDT

Related Topics

* Euro hits lowest since Oct. 1, eyes key support at $1.28

* S&P's Spanish rating cut reminds risk of Moody's downgrade

* Aussie rebounds after Sept employment beats forecast

By Chikako Mogi

TOKYO, Oct 11 (Reuters) - The euro fell on Thursday as uncertainty over Spain's bailout prospects continued to spook sentiment, while a drop in share markets due to worries about slowing global growth further dented investor risk appetite.

The euro slipped after Standard & Poor's cut Spain's sovereign credit rating to BBB-minus, just above junk status, with a negative outlook reflecting its view that there are significant risks to economic growth and budgetary performance, as well as a lack of clear direction in euro zone policies.

S&P's two-notch downgrade from BBB-plus brings it in line with a Baa3 rating by Moody's Investors Service, which has yet to announce the result of its review on Spain, with the potential for a possible downgrade.

Spain is holding off asking for external assistance, which would if granted pave the way for the European Central Bank to utilise its new scheme of buying bonds of struggling euro zone states that ask for aid to help reduce their borrowing costs.

Investors widely expect some kind of aid package for Spain, which has also applied for a euro zone bank rescue, as the prolonged recession deepens the government's fiscal deficits. But the prospect the euro zone's fourth-largest economy will follow smaller peers - Greece, Portugal and Ireland - in asking for lifelines by international lenders has instilled uneasiness.

"Given that the S&P still kept Spain's investment grade, the reaction was much more than expected, suggesting how players would rather enter the market short than long the euro," said Kimihiko Tomita, head of foreign exchange for State Street Global Markets in Tokyo.

"The market was waiting for fresh news with some weight to push the euro lower as the currency has remained quite resilient to negative news recently," Tomita said.

The euro slipped 0.2 percent to $1.2845, after hitting its lowest since Oct. 1 of $1.2825. The currency is under growing pressure and may test key technical support at its 200-day average of 1.2823, and the Oct. 1 low of $1.28035.

Asian equities were weighed by a drop in global stock prices overnight as the International Monetary Fund and the World Bank earlier this week provided a grim outlook for global growth in 2012 and 2013, with warnings about a slowdown in China, the world's No. 2 economy and the top consumer of raw materials.

"With U.S. stocks falling, and IMF and World Bank raising alarms about the Chinese growth slowdown, market sentiment is against risk - and growth-sensitive or high-yielding currencies are prone to downside risks," said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.

Saito said if the euro breaks below key technical support around $1.28, it could easily drop 200 to 300 pips regardless of whether there is news or data.

JOBS DATA LIFTS AUSSIE

The euro's weakness was magnified by a rebound in another risk-sensitive currency, the Australian dollar.

The Australian dollar erased earlier losses on short covering after the country's employment rose more than expected by a seasonally adjusted 14,500 in September, while the jobless rate also rose to 5.4 percent as more people joined the workforce.

The Aussie rose to a near one-week high of $1.0266, moving away from its three-month low of $1.0149 hit on Monday, and also regained against the yen to 80.06 yen from below 80 yen before the data.

"The Aussie is a risk currency, but there is an emerging view recently that some investors may be preferring the Australian dollar as a sort of reserve currency now that the euro is clearly unstable. This may be one reason why the Aussie has remained relatively resilient," said Tomita at State Street Global Markets.

The euro fell about 0.5 percent against the Aussie at A$1.2514, its lowest since Oct. 2, and was down 0.3 percent against the Japanese yen at 100.25 yen.

The Japanese currency's strength against an overall weak euro capped dollar/yen, which eased 0.1 percent to 78.07 yen . But the pair's downside was also limited, with some traders citing stop-loss orders placed around 78 yen.

Tomita said repeated remarks by Japanese authorities that a strong yen is detrimental to the country's economy may turn sentiment bearish towards the yen.

Heightening risk-aversion could prompt speculative plays on the safe-haven dollar/yen as the Group of Seven finance ministers is scheduled to meet in Tokyo on Thursday, Saito said.

The euro zone crisis, U.S. fiscal problems and a slowdown in economic growth in China and other emerging countries are expected to dominate the agenda of the G7 meeting on the sidelines of separate meetings of the International Monetary Fund and World Bank.

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