* Euro steady; worries on Ireland, wider debt crisis weigh
* Aussie gains after China raises banks’ reserve requirement
* Relief that China did not raise interest rates helps risk
(Updates prices, adds quote)
By Jessica Mortimer
LONDON, Dec 10 (Reuters) - The euro held steady against the dollar on Friday while the Australian dollar staged a relief rally after China increased the reserve requirement for banks but kept interest rates on hold.
The Aussie -- which is most sensitive to monetary tightening in China given Australia’s close trading links with the country -- dipped briefly after Beijing increased the reserve requirement by 50 basis points. [ID:nTOE6B907U]
But it soon pushed back up, taking the euro and other perceived higher risk currencies with it on relief that China had not opted to raise interest rates as well given another jump in Chinese exports last month. [ID:nL3E6NA0GA]
“In recent weeks people have been talking about the possibility of a rate hike in China,” said Niels Christensen, currency strategist at Nordea in Copenhagen.
“Given they only announced a reserve requirement hike we are seeing a bit of a relief rally as it has given a small boost to risk appetite. This has especially helped the Aussie and the New Zealand dollar.”
The euro underperformed, however, holding up against the dollar but falling against other currencies, including sterling EURGBP=D4 and the Swiss franc EURCHF= on lingering concerns about peripheral euro zone debt.
The euro was 0.1 percent higher at $1.3253 EUR=, staying above a low of $1.3164 on trading platform EBS on Thursday. Traders cited option expiries at $1.3250 later in the session.
Sentiment towards the euro was shaky after Moody’s said on Thursday it may downgrade the ratings of some Portuguese banks. [ID:nWNA6521] The announcement followed Fitch’s earlier decision to slash Ireland’s rating by three notches. [ID:nLDE6B81AH]
Ireland’s government will seek parliamentary approval for an 85-billion-euro IMF/EU rescue package next week, though there were concerns about political infighting as the opposition Labour Party pledged to vote against it. [ID:nLDE6B81XS]
Traders say no end is in sight for the debt crisis with European leaders now clashing over the idea of joint euro zone bonds. [ID:nLDE6B70R1] French President Nicolas Sarkozy met German Chancellor Angela Merkel on Friday to prepare a joint position for next week’s EU summit. [ID:nLDE6B823X]
Merkel said on Friday there was no question of boosting a euro zone financial safety net and reiterated her opposition to the issue of joint euro bonds. [ID:nBAE003860]
“Currently the market appears reluctant to aggressively short the euro suggesting that the politicians have a lot to live up to next week,” said Jane Foley, senior currency strategist at Rabobank.
The Australian dollar rose 0.4 percent to $0.9883 AUD=D4, recovering after a brief dip to around $0.9845 after China's announcement. Analysts warned, however, that a China rate rise was still possible as the country battles to stem rising inflationary pressures.
“Everyone is on watch for China, especially ahead of the CPI figures this weekend,” said Jeremy Stretch, currency strategist at CIBC. “Rumours are that CPI could be north of 5 percent; if that’s the case it will underline the scale of the inflation problem. I wouldn’t want to go home too long on the Aussie.”
The dollar .DXY index, which tracks the greenback’s performance against a basket of major currencies, dipped 0.2 percent to 79.936, struggling to break through the 80.00-81.50 barrier that capped its November rally.
The dollar index was off a high of 80.405 reached earlier this week as healthy demand at a 30-year auction of U.S. Treasuries on Thursday pushed U.S. yields down.
Against the Japanese currency, the greenback was down 0.2 percent at 83.50 yen JPY= with stops lined up below 83 yen.
The dollar’s repeated failure since late last month to take out resistance around 84.40 yen is encouraging many traders to take profits near that level, leading to expectations that its 83.50-84.50 range will persist for now. (Additional reporting by Naomi Tajitsu and Anirban Nag; Editing by Susan Fenton)