* Moody’s says may downgrade Portugal by one or two notches
* Euro pares gains but supported on China comments
* Spanish bond auction due at 0935GMT
(Changes dateline, adds quote, previous TOKYO)
By Neal Armstrong
LONDON, Dec 21 (Reuters) - The euro pared gains in thin trade on Tuesday after ratings agency Moody’s put Portugal on review for a possible downgrade, capping an early rally triggered by comments from China.
Moody’s Investor Service said it may downgrade Portugal’s A1 rating by one or two notches after a review, citing concerns about the country’s weak growth prospects and high borrowing costs in the latest ratings-related jolt to a euro zone member.
Comments from a Chinese vice premier that China supports efforts by the EU to calm global markets in the wake of Europe’s debt crisis were enough to trigger a short-covering rally in holiday-thin trade in the Asian session. [ID:nTOE6BK01Q]
But Beijing’s challenge to the EU to deal swiftly with its debt woes also highlighted the extent of concern over the still expanding crisis.
“The Moody’s announcement on Portugal has knocked some of today’s optimism out of the euro but these credit announcements are not completely out of the blue any more so the negative reaction is always going to be a little bit more dampened than six months ago.” said Jane Foley, senior currency analyst at Rabobank.
“I don’t think this announcement on its own will be capable of knocking the euro out of its range.” she said.
The euro fell around 45 pips to trade at $1.3144, still up around 0.2 percent on the day. It made a brief show above $1.3200 in the Asian session, extending its rebound from Monday’s trough of $1.3094, its lowest level since Dec. 2.
In a positive sign, the currency has managed to crawl back above its 200-day moving average, now sitting at $1.3102.
Many market players think pressure will remain on the euro as a number of investors fret that the debt crisis that has already engulfed Greece and Ireland could put Portugal and Spain under more pressure early next year.
“It seems clear that from January the debt problems will still be very much there. These countries need to raise a lot of money early next year.” said Beat Siegenthaler, currency analyst at UBS in Zurich.
Spain auctions treasury bills around 0935GMT -- the last auction this year by one of the euro zone’s struggling members. [ID:nLDE6BJ1K4]
Moody’s also said on Monday it may cut the ratings on Spanish banks following its multi-notch downgrade of Ireland’s credit rating last week.
“Recent auctions have tended to surprise on the positive side. We haven’t seen failures and I don’t think that will be the case today,” said Siegenthaler at UBS.
The euro stayed within striking distance of a low of 1.2636 Swiss francs EURCHF=EBS marked on trading platform EBS on Monday, its weakest since the euro’s launch in 1999.
It was last quoted at 1.2650 francs, close to flat on the day. Traders say the strength of the Swiss franc, often seen as a safe haven currency, is further evidence of investors’ desire to reduce exposure to the euro within Europe.
The dollar was flat at 83.66 yen JPY= with strong support seen at around 82.80 yen, its low from last week.
The Bank of Japan kept monetary policy steady as widely expected on Tuesday, holding off on easing as expected. [ID:nTKZ006700]
The Australian currency rose 0.2 percent against the dollar to $0.9955 AUD=D4, returning to an uptrend after hitting a low of $0.9830 late last week.
The Aussie moved little after minutes from the Reserve Bank of Australia’s policy meeting confirmed it is in no hurry to raise rates.
Additional reporting by Hideyuki Sano, editing by Patrick Graham