December 17, 2010 / 1:27 AM / in 7 years

Euro slips after Moody's slashes Ireland's rating

NEW YORK (Reuters) - The euro fell against the dollar on Friday and looked set to extend losses after a multi-notch downgrade of Ireland’s credit rating overshadowed solid German economic data and underscored the severity of the bloc’s debt crisis.

Moody’s Investors Service slashed Ireland’s credit rating by five notches to Baa1 with a negative outlook from Aa2 and warned further downgrades could follow if Ireland was unable to stabilize its debt situation.

The euro hit a low around $1.3220, with key support seen around $1.3105, its 200-day moving average. A break below could see the currency retest the $1.30 level and slide toward its December low of $1.2970, traders said.

“Overall, the outlook for the euro doesn’t look very positive. Going into the year-end, we continue to favor euro/dollar breaking lower,” said Mary Nicola, currency strategist at BNP Paribas in New York.

An agreement by European Union leaders to set up a permanent crisis management mechanism from mid-2013 disappointed investors who had hoped for more active measures such as expanding the European Financial Stability Facility or issuing joint European sovereign bonds, so-called “E-bonds.”

The euro last traded at $1.3223, down 0.1 percent on the day and near its session low of $1.3217 set on trading platform EBS.

The euro zone single currency had earlier climbed as high as $1.3360 after the Ifo index showed German business morale hit its strongest since 1991 in December.

Selling before a central bank fixing helped to accelerate the euro’s losses in thin liquidity, traders said. Leveraged accounts and a semi-official European name were also seen dumping the currency.

Boris Schlossberg, director of currency research at GFT in New York, said the strong German data could limit the euro’s downside.

“Germany’s financial health is absolutely vital to the stability of the European monetary union and as long as its economy can maintain momentum euro/dollar’s decline is likely to be contained,” he said.

EU SUMMIT

EU leaders on Friday agreed at a summit to try to lengthen the maturities of new sovereign bond issues, and confirmed that private investors will be involved in the future euro zone rescue mechanism, a draft statement showed.

While officials acknowledged there was resistance to the idea of issuing joint euro bonds, analysts said the lack of any new insight into how the EU will address the issue of debt had helped to sour sentiment for the euro.

“What we’ve heard from the EU summit has been lukewarm, not as informative as some in the market were hoping,” said Henrik Gullberg, currency analyst at Deutsche.

“The euro’s rally earlier this week may have been fueled by expectations the EU would offer more clarification, and there may be a gradual realization that that is not the case.”

Paul Robson, currency strategist at RBS, said a bearish euro view was also reflected in the euro-crosses, with the single currency hitting a record low against the safe-haven Swiss franc. The euro fell to a low of 1.2720 francs, before recovering to 1.2772 francs.

The Swedish crown rose to its highest against the euro since 2006.

The dollar was marginally lower at 84.01 yen, having repeatedly failed to break cleanly above 84.50 yen since late November, in spite of higher yields on the back of improving economic data.

Additional reporting by Anirban Nag and Naomi Tajitsu in London; Editing by

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