December 12, 2011 / 4:11 AM / in 7 years

Euro spooked by ratings worry; further downside eyed

SYDNEY (Reuters) - The euro wallowed at two-month lows in Asia on Tuesday, while commodity currencies also nursed heavy losses as investors braced for a possible mass downgrade of euro zone sovereign credit ratings as soon as this week.

One hundred Euro banknotes lay on top of various Swiss Franc notes in this picture illustration at a bank in Warsaw, July 18, 2011. REUTERS/Kacper Pempel

Market tension flared after rating agencies on Monday warned that last week’s EU summit, billed by some as a last chance to save the euro, has not gone far enough to ease immediate concerns on the region’s debt markets.

The euro fell 1.6 percent to reach a 2- month low at $1.3164, before steadying at $1.3175. A break below the October 4 trough around $1.3145 would take the common currency back to depths not seen since mid-January.

MacNeil Curry, technical strategist at Bank of America/Merrill Lynch, dropped his bullish euro/dollar call and adopted a neutral view following the fall below $1.3212.

“With the break of support, the next level of note is the 1.3146. Through here would turn us negative, opening significant downside potential, targeting 1.2510,” he said.

Commodity currencies also suffered steep declines with the Australian dollar shedding more than one cent to $1.0056. It looked set to retest Friday’s trough at $1.0048.

Renewed weakness in the euro and heightened risk aversion help the dollar index .DXY jump more than 1 percent to its highest level this month. The dollar also firmed against the yen, coming close to 78.00 at one stage.

The moves come at a time of dwindling market liquidity, with the year-end holidays fast approaching, and do not bode well for the bond sales by Italy and Spain on Wednesday and Thursday.

Ahead of that, a closely watched survey of German analyst and investor sentiment and U.S. retail sales data are on offer.

The U.S. Federal Reserve also holds its final policy meeting for the year on Tuesday, but is not expected to take any policy action, other than put the final touches to its communication strategy

“The net effect of the data will likely be to reinforce European gloom, and highlight he divergence between US and European data,” said Kit Juckes, head of foreign exchange research at Societe Generale.

“There is a chance that this will be reflected in U.S. equity indices also de-coupling from the EUR/USD rate. A combination of DXY rising at the same time as SPX rallied would be rare indeed, but is not impossible in the days ahead.”

Editing by Wayne Cole

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