LONDON: The euro fell to a one-week low on Thursday after credit agency Moody's cut Spain's rating, moving the currency towards key support, on worries about how the euro zone will deal with the debt crisis on its periphery.
Moody's downgraded Spain to Aa2 from Aa1 with a negative outlook and warned of further cuts, saying the country's plans to clean up its battered banking sector will cost more than the government expects and add to its debt burden.
The euro fell around half a cent to a one-week low of $1.3804, triggering stop-losses on the break of $1.3850. Traders reported good interest to pick up the dip in the $1.3800 region from Asian sovereign accounts.
The single currency recovered to $1.3847, down around 0.4 percent on the day, though traders said a break of $1.3800 would open up a potential test of the euro's 21-day moving average around $1.3742.
"If speculators really hit Portugal hard there would appear to be an increased possibility that Spain will be put back under the spotlight, but we don't think Spain will need to be bailed out," said Jane Foley, senior currency strategist at Rabobank,
Investors continue to demand a high premium to hold bonds of the euro zone periphery, with Portugal under particular scrutiny and seen under pressure to request financial aid soon.
"Portuguese bond redemptions are looming in April and June so financial assistance for them might need to happen sooner rather than later," said Foley.
The single currency fell further from a one-month high of $1.4036 hit on Monday after last week's hawkish comments on inflation from ECB President Jean-Claude Trichet, which hinted at an interest rate rise in the euro zone as soon as April.
But time spent above $1.40 was brief, with market players expecting the focus to be on fiscal issues in the coming weeks, when European leaders and finance ministers will hold a series of meetings to tackle debt problems, starting with a euro zone summit on Friday.
Investors are sceptical over the potential for progress on boosting the lending capacity of Europe's bailout vehicle, the European Financial Stability Facility (EFSF).
"If there is a close in the euro below $1.3741 then the pair will quickly hit $1.35, which is the top of the weekly cloud," said Simon Smollett, technical and options strategist at Credit Agricole CIB.
The euro's fall pushed the dollar index higher to trade with gains of around 0.3 percent on the day at 76.964.
AUSSIE HIT BY CHINA DATA
The Australian dollar fell after data showed China swung to a surprise trade deficit in February of $7.3 billion, its largest in seven years.
The numbers stirred worries that China's growth could slow and affect countries such as Australia, which has benefited from China's expansion. The Aussie dollar was down around 0.6 percent at $1.0040.
Sterling was down 0.2 percent against the dollar, with the Bank of England's latest decision on interest rates due at 1200 GMT.
Despite increasing debate within the Bank over rising inflation, economists expect rates to be kept at a record low of 0.5 percent and the stock of quantitative easing to be left at 200 billion GBP.
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