Euro off two-month low in Asia

The euro was off a two-month low against the dollar on Friday but the risk of a break below its July trough is seen rising after a deepening debt crisis forced the European Central Bank to drop its tightening policy bias, a key driver in the euro's rally earlier this year.
The market showed a mostly muted response to US President Barack Obama's $447 billion package on jobs that is made up largely of tax cuts for workers and businesses, amid doubts over whether he can push it through a divided Congress. "The euro now doesn't have the support of expectations for rising interest rates, which clearly points to the higher possibility that the euro will fall below (its July low near) $1.38. In addition, strains on European banks' funding are rising. Given all this, the euro looks likely to fall further," said Minori Uchida, senior analyst at the Bank of Tokyo-Mitsubishi UFJ.
In Asian trade, sizable buying in the euro against the yen, thought to be from Japanese investors, lifted the euro slightly against the dollar and the yen. The euro traded at $1.3890, after dropping to $1.3873 on Thursday, its lowest in two months. A close below $1.3900, a 50 percent retracement of the currency's rally from January to May, could raise the case for more weakness.
Traders expect the currency to head towards the July low of $1.38376, a break of which could send a strongly bearish signal, with $1.35 cited as its next possible target. Dollar funding strains for European banks showed no sign of abating with the euro/dollar basis swap spread on Thursday hitting its highest since last 2008.
The common currency stood at 107.65 yen, near its six-month low of 107.54 yen hit on Thursday. Against the Swiss franc, it eased to slightly to 1.2130 franc, still above the 1.20 floor set by the Swiss National Bank. The dollar index stood at 76.23, having surged to two-month highs of 76.319 on Thursday. Against the yen, the dollar stood flat at 77.48 yen.
The Australian dollar gained 0.2 percent to $1.0600, but lacked the energy to tackle a resistance-packed zone from $1.0630, its 55-day moving average, through $1.0648, the 100-day average, to $1.0657, a 61.8 percent retracement of its decline earlier this month.