* Euro falls on doubts about Irish bailout, downgrade
* Traders continue to eye bond yields
* Euro to retest $1.30 as Spain remains a concern
(Adds comment, updates prices, adds dollar move after
By Wanfeng Zhou
NEW YORK, Dec 9 The euro fell against the
dollar on Thursday and looked set to retest the key $1.30 level
after a ratings agency downgraded Ireland's sovereign debt and
as investors waited for a vote on a rescue package for the
The dollar dropped against the yen as Treasury yields fell
after a solid 30-year bond sale, though analysts said the
pair's higher trend stays intact on expectations yields will
continue rising into the end of the year.
Ireland's Labor Party earlier said it would vote against a
85 billion euro rescue deal form the International Monetary
Fund and the European Union when it comes before parliament
next week, raising concerns about Ireland's ability to service
and redeem outstanding debt. But two independent MPs said they
would support the package, signaling its likely passage. For
details, see [ID:nLDE6B81XS]
"The sovereign issues in the euro zone are continuing.
There are a lot of headline risks for the euro coming out,"
said Amelia Bourdeau, senior currency strategist at UBS in
Fitch became the first ratings agency to strip Ireland of
its A credit status on Thursday, slashing it by three notches
to BBB+, pointing to the fiscal costs of restructuring.
The euro last traded 0.2 percent lower at $1.3231
EUR=EBS, after hitting a session low of $1.3164 on trading
The next key target for the euro is $1.3150, followed by
its 200-day moving average around $1.3115. Traders see the euro
falling back to its December low of $1.2970 in coming weeks.
Graphic on U.S. tax cuts, stimulus and deficits
Graphic on the yen and Japan/U.S. bond spreads:
Graphic on the euro and German/U.S. bond spreads:
For story on tax deal impact on stocks see [ID:nN08175057]
Many analysts said that regardless of the outcome in
Ireland, the euro is likely remain under pressure as market
participants continue to focus on debt problems in other euro
bloc countries, especially Spain, whose economy accounts for
nearly 12 percent of euro-wide gross domestic product.
"Spain is a much, much bigger problem than Greece, Ireland
and Portugal all put together," said Vasileios Gkionakis, macro
strategist at Fulcrum Asset Management LLP in London. Fulcrum
oversees about $900 million in assets.
"The banking sector is the pivotal issue as a lot of the
government debt is owned by the country's baking sector. A
potential government failure will imply a major hit onto bank
balance sheets," he added.
DOLLAR AND YIELDS
A rise in U.S. Treasury yields over the last two sessions,
which sent Treasury debt prices into their sharpest fall in
nearly two years, has boosted the dollar against the yen on the
view the proposed tax cut extension would spur growth.
Data showing a larger-than-expected decline in weekly
claims for first-time U.S. jobless benefits added to the view.
"In the short term, the U.S. dollar will continue to be
supported because the tax cut measures announced are pretty
much a fiscal stimulus," said Gkionakis. "It may also imply
that the Fed may act less decisively to try to push yields
lower if the economy is doing better."
The dollar slipped 0.4 percent to 83.69 yen JPY=, after
hitting a session low of 83.51 yen following the Treasury
auction. For details, see [ID:nN09493895]
Analysts said investors were wary of taking on big
positions as liquidity dries up toward year end, and this was
why the dollar's rise had been limited compared with the jump
in Treasury yields.
The dollar index has risen only 0.7 percent this week while
the 10-year U.S. yield has soared around 25 basis points.
Daragh Maher, FX strategist at Credit Agricole, argued the
correlation between currencies -- particularly the euro, yen
and Australian dollar -- and movements in two-year yield
differentials were stronger than for 10-year yields.
The two-year yield has risen less than 15 basis points this
week, much less than the 10-year yield, as the short end of the
yield curve has been anchored by expectations the Federal
Reserve is unlikely to raise interest rates any time soon.
"For interest rates to gain greater traction on FX, the
shorter end has to move, and we're not seeing that yet," Maher