NEW YORK (Reuters) - The euro hit a one-month high against the U.S. dollar on Wednesday, lifted by Moody's rating agency affirming Spain's investment grade rating and growing speculation Madrid will ask for a bailout next month.
Moody's rating, which is contingent on Spain implementing fiscal reforms and the European Central Bank stepping in to buy bonds of peripheral euro zone countries, soothed concerns about a downgrade to junk status. That pushed Spanish yields lower before an auction on Thursday and helped the euro.
The euro has been supported in recent weeks by bets that Spain will eventually request a bailout, a move that would open the way for the European Central Bank to buy Spanish debt and help lower borrowing costs. Talk that a line of credit could be extended to Spain has also boosted the euro.
"Moody's confirmed (Spain's) rating at Baa3/neg easing fears that the sovereign would be downgraded below investment grade," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
The euro was up 0.6 percent on the day at $1.3128, its highest since mid-September. Strong resistance was seen at $1.3169, the four-month high set on September 17, with stop-loss buy orders cited above $1.3180 and reported option barriers at $1.3200.
Traders cited strong bids from sovereign investors at $1.3080 but most market players were cautious about driving it above $1.3200 without a definite aid request from Madrid.
Some US$4.286 billion in euros changed hands using Reuters Dealing on Wednesday.
"It's supportive that Spain avoided a downgrade but the bigger driver is more expectations that Spain will soon require some form of financial support from Europe," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi in London.
The timing of such an aid request, however, remains unclear.
Hardman said the euro could squeeze as high as $1.35 after a Spanish bailout request but may falter there if concerns resurface that euro zone policymakers are being complacent in tackling the long-running sovereign debt crisis.
Expectations of progress in addressing Greece's problems at a European Union summit on Thursday and Friday were low. A German official, speaking on condition of anonymity, said he did not expect any substantial discussion of Greece at the summit, adding that he also did not foresee an interim report from international lenders on the Greek economy.
A possible line of credit to Spain and the some easing of German opposition for aid to peripheral countries were likely to support the euro in the near term.
The euro also touched a one-month high against the yen, before trimming gains to trade up 0.4 percent at 103.33 yen.
The yen has been held back recently by speculation about the potential for further monetary easing by the Bank of Japan, which holds its next policy meeting on October 30.
Market talk about the potential for dollar-buying flows related to Japanese mobile operator Softbank Corp's (9948.T) $20 billion deal to buy U.S. wireless carrier Sprint Nextel Corp (S.N) has also weighed on the yen in recent sessions.
The dollar dipped 0.2 percent to 78.71 yen, retreating from Tuesday's one-month high.
The dollar did pare losses against the yen after a report indicated groundbreaking on new U.S. homes surged in September to its fastest pace in more than four years, a sign the housing sector's budding recovery is gaining traction.
"Housing starts and building permits were stronger in September but the sector has been marking time for the past six months at half its historic annual rates," said Joseph Trevisani, chief market strategist at Worldwide Markets, Woodcliff Lake in New Jersey. "When growth and employment return to the economy construction will pick up rapidly."
The dollar fell against the Swiss franc and hovered near a five-month low of 0.9210 francs.