NEW YORK: The euro fell against most currencies on Friday and was flat against the dollar, on track for its worst weekly performance in three months versus the greenback, with the threat of euro zone sovereign downgrades keeping the common currency vulnerable to further sell-offs in the upcoming week.
Fitch Ratings on Friday warned it may downgrade cut France and six euro zone countries led by Italy, Spain, and Belgium due to a lack of a comprehensive solution to the two-year old sovereign debt crisis. The ratings firm did affirm France's triple-A rating, with the country supported by a wealthy and diversified economy. For more, click on.
The Fitch news spurred selling in the euro that pushed it to a global session low, below $1.30.
"I don't have much confidence that the euro will go higher from here," said Raymond Attrill, head of FX strategy for North America, at BNP Paribas in New York. We could have some headline risks out of Europe, get some news out of ratings agencies that sort of confirms the fears about downgrades and we could easily be two to three big figures below $1.30."
In mid-afternoon trading, the euro was flat at $1.30151. It was down 2.7 percent on the week, its largest weekly loss since the week of September 11. Traders reported thin end-of-year liquidity. It hit a global session high of $1.30846, earlier boosted by some short-covering.
In the near term, a euro bounce, if it happens, might extend to $1.31, although gains could be limited from there. Thin and illiquid trading conditions through the upcoming holiday period could mean constrained movement, with short-term support in the $1.3010/15 area.
"Overnight, we saw a little bit of a rebound in the euro, basically some profit-taking and positioning ahead of the weekend," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
"But ultimately I think the story is a negative one for the euro and that will continue to play itself out over the week ahead."
Analysts said a threat of downgrades from rating agency Standard & Poor's, which put a raft of euro zone countries on review ahead of the summit, continued to hang over governments, including Germany and France.
Despite downgrade rumors circulating since last week, Italian and Spanish bond spreads over Bunds tightened on Friday.
"There remains a great deal of concern about the direction of the euro zone," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "We're still not trading on fundamentals and haven't been for some time."
Earlier this week, the euro dropped to an 11-month low around $1.2945 and a break below that level would open the door to a test of the January low around $1.2871.
Analysts said investors were concerned some European Union states may develop cold feet over proposals on a tighter fiscal regime that were the centerpiece of the summit.
Uncertainty over the outcome of Greek debt swap negotiations and signs some national central banks, including Germany's, were reluctant to boost lending to the International Monetary Fund added to the view the crisis may intensify in the new year.
About 600 billion euros are available to fight the debt crisis and more will be provided in March if needed, more than Italy and Spain's combined funding needs for 2012, European Financial Stability Facility chief Klaus Regling said on Friday..
In the options market, one-month euro/dollar implied volatilities hit a 3-1/2-month low around 12.1 percent, coming further off levels that prevailed in recent months. Options traders attributed the decline to many institutions closing their books ahead of the Christmas holidays rather than to reduced anxiety about the euro zone debt crisis.
The euro added to recent losses against the Swiss franc, falling 0.2 percent to 1.22150 francs. The Swiss National Bank has held its cap on the franc at 1.20 per euro, dampening talk that they may raise the peg.
Commodity currencies were higher, with the Australian dollar up 0.3 percent at US$0.9947. The New Zealand dollar was also well bid, rising 1.0 percent to US$$0.7600.
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