SYDNEY: The euro languished at one-week lows versus the dollar in Asia on Thursday, faced with little recovery prospect as worries about European sovereign debt problems outweighed a widely expected interest rate hike by the European Central Bank.
Worries that Greece's debt crisis would spread to other highly indebted peripheral euro zone countries flared up this week after Moody's slashed its rating for Portugal to junk status. This saw Portuguese bond yields shoot to record highs.
"Now with euro peripheral contagion back in rage, the ECB meeting is almost relegated to the status of a sideshow ... the potential for Mr Trichet to do or say anything that will immediately propel the euro significantly higher is considerably diminished," BNP Paribas analysts wrote in a note.
In fact, if anything a softening in ECB President Jean-Claude Trichet's hawkish stance could further weigh on the euro, traders said.
The euro was last at $1.4326, having plumbed a trough around $1.4283 overnight. Support is seen at the session low, a level representing the 61.8 percent retracement level of the June 27 to July 4 rally.
A break of that could see the common currency return to $1.4213, the 76.4 percent level, before fully reversing the rally. Still, analysts don't expect the euro to fall too sharply in the months ahead, underpinned by higher interest rates, a Reuters poll showed.
Analysts in the survey see the euro at $1.3900 in a year's time. See for latest Reuters forex poll.
Against the safe-haven Swiss franc, the euro reached a low around 1.1958 francs before recovering a bit to last stand at 1.2020. It was, however, not far off a record low near 1.1800 set recently.
The dollar benefited from the euro's woes, rising against a basket of major currencies. The dollar index climbed above 75.000, pulling further away from a one-month low of 74.133 set earlier in the week.
Against the yen, it was at 80.90 , staying in a well-worn range roughly between 79.80 and 81.30.
Commodity currencies fared surprisingly well in the face of renewed pressure on the euro and China's interest rate hike.
China raised rates for the third time this year, but analysts suggested it was close to, or even at the end, of its tightening cycle. There was also some optimism that it would not be threatened by a hard landing.
"While the euro is suffering on the back of such negative news flow, unlike the 2010 episodes of euro zone debt woes, the risk aversion impact appears to be getting increasingly narrow," noted Frank Peter, strategist at Societe Generale.
"Interestingly, even with the announcement of another China policy rate hike, USD, JPY and CHF gains against the commodity bloc currencies were marginal or non-existent," he added.
Indeed, the Australian dollar recovered from a dip to one-week lows around $1.0655 to last stand near $1.0700, while the New Zealand currency at $0.8273, was not far off a 30-year peak of $0.8332 set earlier this week.
The Aussie could extend its gains if employment data due at 0130 GMT surprises on the upside. Forecasts centred on a rise of 15,000 jobs in June and a steady unemployment rate of 4.9 percent.
Copyright Reuters, 2011
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