June 8, 2009 / 12:15 PM / in 10 years

FOREX-Ireland downgrade knocks euro, dollar up broadly

* Ireland downgrade pushes euro down near $1.38

* Dollar index .DXY hits highest since May 20

* Sterling down on UK political uncertainties

(Updates prices, adds quote, changes byline)

By Harpreet Bhal

LONDON, June 8 (Reuters) - The euro retreated across the board on Monday, weighed down by a sovereign downgrade for Ireland that added to the dollar’s broad gains extending from the sharp rise in U.S. bond yields late last week.

Ratings agency Standard & Poor’s cut Ireland’s sovereign credit rating on Monday to AA from AA+, its second downgrade in three months, pushing the euro to a near-two week low of $1.3806.

For more on the downgrade, see [ID:nL8601886].

The euro’s decline helped boost the dollar, which had been lifted by smaller-than-expected job losses in the United States last week and expectation that the U.S Federal Reserve could raise interest rates earlier than previously thought.

“The euro was under pressure after last week’s dollar bounce and the downgrade puts further pressure on it now,” said Geraldine Concagh, economist at AIB Group Treasury in Dublin.

At 1140 GMT the euro was down 0.9 percent at $1.3844 EUR=, and was down 1 percent against the yen at 136.41 yen EURJPY=.

The dollar index, measured against a basket of six major currencies .DXY was up 0.7 percent at 81.215, after climbing 1.6 percent on Friday, its best performance since Dec.19, Reuters data showed.

The dollar was down marginally against the yen at 98.50 yen JPY=.

VIGILANT FED

The dollar was buoyed before Ireland’s downgrade as investors focused on improving prospects for the U.S. economy, reversing a trend where the dollar had been sold for higher risk currencies in response to better economic fundamentals.

Market players covered dollar-short positions, exacerbating gains, as many thought the dollar’s recent falls were overdone.

The pace of U.S. job losses slowed sharply last month, the strongest sign to date that the recession is diminishing, even as the unemployment rate hit its highest in nearly 26 years. [ID:nN05274048]

The dollar has been gaining ground boosted by the hope of an economic recovery in the U.S, reversing a trend where the dollar had been sold in favour of riskier currencies.

The prospect of economic recovery prompted 2- and 10-year U.S Treasury yields to hit their highest levels on Monday since November, driving the dollar higher.

“Payrolls didn’t appear as bad as expected, and the Fed’s Lockhart said the Fed might start tightening cycle (soon) ... which has prompted sharp dollar buying across the board, together with short-end U.S. yields rising sharply,” said Roberto Mialich, FX strategist at Unicredit in Milan.

Atlanta Fed President Dennis Lockhart said on Friday the Fed needs to be “anticipatory” and not wait too long before tightening monetary policy [ID:nN05506543].

With currency movements closely following U.S. bond yields, markets will focus on a slew of Treasuries auctions this week. The U.S. government is scheduled to sell $65 billion in debt including 10-year and 30-year securities. [US/]

Political uncertainties in the United Kingdom, meanwhile, weighed on sterling, as prime minister Gordon Brown faced renewed questions over his leadership after a spate of ministerial resignations and a dismal performance by the Labour party at the European elections. [ID:nL8408990]

Brown is to have a tense meeting later on Monday with Labour members of parliament, some of whom have urged him to step down for the sake of the party.

Support for his ruling Labour Party plunged to its lowest level in a century in elections to the European parliament.

Sterling was down 0.4 percent against the dollar at $1.5904 GBP= but rose to 87.05 pence against the broadly weak euro EURGBP=.

Reporting by Harpreet Bhal; Editing by Victoria Main

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