Euro hit by fading debt hopes, core economy worries

LONDON: The euro fell on Tuesday after a sharp drop the previous day, as reduced hopes of a comprehensive solution to the euro zone's debt crisis and a warning over France's sovereign credit rating prompted investors to revert to selling the currency.

A fall in German analyst and investor sentiment to the lowest in nearly three years fuelled further concerns over the impact of the crisis on the core of the euro zone and pushed the euro to the day's lows of $1.3657 on trading platform EBS.

The euro was last down 0.4 percent on the day at $1.3678 after running into reported sovereign demand ahead of $1.3650. It had shed 1.1 percent on Monday, with market positioning and some technical signals suggesting that its recent short-covering rally had run out of steam.

"We continue to head lower with expectations reduced for this weekend's EU summit, but the outcome of the November G20 summit is still key," said Geoff Kendrick, currency strategist at Nomura in London.

"If there's no action taken on plans for bank recapitalisation at the G20 then the euro will be sub $1.30 very quickly," he added.

German Finance Minister Wolfgang Schaeuble poured cold water on the euro's recent rally on Monday, saying an Oct. 23 European Union summit would not provide a "definitive solution" to the region's debt crisis.

G20 leaders are under pressure to look beyond their own domestic issues and take action to tackle the international financial crisis to regain the trust of financial markets when they convene in Cannes at the beginning of November.

While some gauges of market positioning suggest speculators may still be short the euro, the amount of their euro bearish bets is likely to have declined over the course of the recent rally, leaving the euro vulnerable to more selling.

The common currency was well below a one-month high around $1.3914 hit on Monday on trading platform EBS. Traders said it was under near-term pressure after the break of Friday's low at $1.3720, with Asian sovereign demand reported in the $1.3650 region.

Key resistance was at $1.3940, around the 55-day moving average and a couple of daily highs hit in September

"The euro was quite oversold down at the October lows near $1.3150 and in the absence of more negative news I don't think the euro can go back down there at the moment. The range looks like $1.36-1.40," said Adrian Schmidt, currency strategist at Lloyds Banking Group. FRANCE WARNING

Worries over the health of the European economy kept pressure on the euro, after Moody's warned on Monday it may slap a negative outlook on France's triple-A credit rating in the next three months if the country fails to make progress on crucial fiscal and economic reforms.

The premium investors demand to hold French government bonds rather than benchmark German Bunds rose to a 16-year high on Tuesday after Moody's warned the sovereign's credit rating outlook could deteriorate.

The Australian dollar was down 0.2 percent to $1.0133, retreating after hitting a one-month high of $1.0372 on Monday.

A batch of Chinese data was broadly in line with market expectations, confirming that China's economic growth was moderating but not weakening sharply, and had limited impact on the Aussie.

The Aussie dollar can be sensitive to shifts in China's economic fundamentals since China is a major buyer of Australia's commodity exports.

The dollar held steady against the yen at 76.80.

Copyright Reuters, 2011