Euro fragile after steep fall, ECB in focus

SYDNEY: The euro stayed on the back foot in Asia on Wednesday, having suffered a steep fall against the Swiss franc and the dollar after Moody's slashed Portugal's credit rating to junk status.

The move reignited fears about other highly indebted peripheral euro zone countries, just as worries about Greece eased a little after it secured a new tranche of emergency loans from international lenders.

"While the market has moved on from Greece a little, there are still significant concerns out there that it's not close to the end game," said Greg Gibbs, strategist at RBS in Sydney.

The euro fell to a low around 1.2093 Swiss francs , from above 1.2200, after Moody's cut Portugal's credit rating by four notches to Ba2, saying there is great risk the country will need a second round of official financing before it can return to capital markets.

Traders said the break of support around 1.2180 francs triggered more selling in a move that unwound about a third of last week's 4.3 percent rally. It last stood at 1.2130 francs.

Against the dollar, the common currency dropped about a full cent to a low around $1.4395 , before recovering a bit of ground to $1.4428.

The session low, a Fibonacci support representing the 38.2 percent retracement of the June 27 to July 4 rally, is likely to hold for now. Next support is seen at $1.4339, the 50 percent retracement.

Traders said the market is already fully priced for a rate hike by the European Central Bank on Thursday, and the euro's near-term outlook depends on whether ECB President Jean-Claude Trichet sounds hawkish or not.

"The commentary from Trichet will be important. The risk is more to the downside given the data recently have been soft," Gibbs added. Renewed weakness in the euro helped the dollar index , which tracks the greenback's performance against a basket of major currencies, climb off a one-month low of 74.133 plumbed on Monday. It was last at 74.651.

The dollar also firmed against the yen, rising to 81.10 , near the top-end of the prevailing range roughly between 79.80-81.30.

Meanwhile, commodity currencies like the Australian dollar held up pretty well even as the euro slumped. Talk of bids from Asian central banks and local exporters around $1.0660/70 for the Aussie appeared to be providing a floor for now.

The Aussie last stood at $1.0688, off Tuesday's session low around $1.0664. It came under pressure in the previous session following less upbeat comments from the Reserve Bank of Australia.

"Our core view is one more tightening remains on the cards late this year, but the data that flows under the bridge between now and then will be critical," said analysts at St. George Bank.

"Whereas at the start of this year, the risk was that more than one tightening would be needed. Now the growing risk is that no tightening will be needed this year.

Copyright Reuters, 2011