Euro slips on weak data, France rating warning

NEW YORK: The euro fell for a second day against the dollar on Tuesday, pressured by disappointing German sentiment data, a warning on France's triple-A credit rating and fading hopes of a comprehensive solution to the euro zone debt crisis.

More euro losses are likely, analysts said, as markets further pare back expectations for bold actions from European leaders to tackle the debt problems. Optimism that a definite plan would be in place by this weekend's European Union summit had pushed the euro to a one-month high above $1.39 on Monday.

"The market last week got a little bit overly optimistic that some kind of miracle plan would be put together in the very near term," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

"We are coming from probably overbought levels for the euro so I still see some more downside," he added.

The euro last fell 0.3 percent at $1.3701. It hit a session low of $1.36570 on trading platform EBS after data showed a fall in German investor sentiment to the lowest in nearly three years, stoking fears the worsening debt crisis could drag Europe's leading economy back into recession.

Traders reported Asian sovereign demand ahead of $1.3650. Analysts said this level could hold in the new few days.

Below that, support lies around $1.3625, which fell on a trendline connecting troughs hit earlier this month. Technical analysts at Barclays Capital say a break below that level could push the euro down to $1.3525, a high hit on October 7.

Disappointing quarterly results from International Business Machines Corp and a rare quarterly loss from Goldman Sachs also weighed on investor appetite for risk and hurt the euro.

The dollar was little changed at 76.76 yen.

FRENCH RATING

Moody's warned on Monday it may slap a negative outlook on France's Aaa credit rating in the next three months if the costs for helping to bail out banks and other euro zone members stretch its budget too much.

"Our concerns that the leveraging up of the EFSF (European Financial Stability Facility) and government recapitalization of European banks may further erode investor confidence in core euro-zone sovereign debt have been reinforced by the warning from Moody's," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ in London, in a note.

The warning comes as European Union leaders are discussing measures to protect the region's financial system from an expected Greek debt default. Those measures should include injection of capital into banks with exposure to Greek debt.

The French risk premium over benchmark German bonds hit a 16-year high after Moody's warning, while the cost of insuring French debt against default rose to near record highs.

France and Germany are spearheading a plan to be presented at an EU summit on Sunday, but German Finance Minister threw cold water by saying that the summit would not provide a "definitive solution" to the debt crisis.

Analysts said the outcome of the November summit of Group of 20 leaders in Cannes is key to regain the trust of investors.

"If there's no action taken on plans for bank recapitalization at the G20 then the euro will be sub $1.30 very quickly," said Geoff Kendrick, currency strategist at Nomura in London.

Copyright Reuters, 2011