NEW YORK: The euro recovered on Monday after a strong sell off last week, but euro zone debt worries continued to mute gains, particularly after a ratings downgrade of Greece.
The euro pared gains after Standard and Poor's cut Greece's rating to B from BB-, dragging it further into junk territory over concerns that a debt restructuring is increasingly likely.
Any changes to Greece's debt structure are also likely to prompt a call for more favorable terms from other nations who are struggling under heavy debt burdens and receiving financial aid, adding to fears about the euro zone economy.
The euro volatility "confirms the whole market skittishness about the viability of the peripheral economies," said Boris Schlossberg, head of research at GFT Forex. "More draconian measures will be necessary to stabilize the situation with a broader solution as Ireland and Portugal will want more favorable terms if Greece gets them."
The euro was up 0.1 percent at $1.4325, after a drop of more than 3 percent in the previous two sessions took it to its lowest since April 19. Friday's drop followed a German news report, which was later denied, that suggested Greece had raised the possibility of leaving the euro zone.
Jean-Claude Juncker, head of the group of euro zone finance ministers, late on Friday dismissed a report in Germany's Spiegel Online magazine that Greece could withdraw from the 17-member euro zone.
While few market players think Greece is likely to drop out of the euro, the European Union is under pressure to renegotiate its financial bailouts of Ireland and Greece with an Irish minister saying any concessions given to Athens should mean better terms for Dublin as well.
"The Greek situation is like a slow motion car crash. The politicians know they have to dip into the pockets to find a solution to the problems facing Greece," said Jeremy Stretch head of currency strategy at CIBC World Markets in London.
Chartists say a break below the euro's 50-day moving average at $1.4279 could signal a broader correction lower towards $1.4020/30.
The euro was up 0.1 percent against the yen at 115.48 yen, but still near a five-week low touched on Friday.
The dollar was little changed against the yen at 80.63 yen, off last week's seven-week low.
Commodity currencies were supported on Monday by a rebound in oil prices, after a plunge in oil, silver and other commodities last week.
The Australian dollar rose 0.5 percent to $1.0737, extending gains on Friday after the Australian central bank said rate hikes would be needed in future to contain inflation.
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