Euro subdued by Spanish rating downgrade

LONDON: The euro fell against the dollar and yen on Thursday after Standard & Poor's cut Spain's credit rating to just above junk, adding to concerns over the country as it holds off seeking a full-scale international bailout.

Signals from the International Monetary Fund - which has talked tough on the euro zone this week - that some of the bloc's struggling governments should be given more time to deal with their problems was a positive for the euro.

 Dealers said losses were also likely to be limited by bids from Asian central banks at lower levels.

But concerns over the debt crisis are creeping back into the market, driving the euro to its lowest in more than a week at $1.2825 in early trade.

It recovered to trade $1.2875, steady on the day and should see strong support at its 200-day moving average at $1.28233 with bids from Asian central banks cited at $1.2850.

At a meeting of the International Monetary Fund in Tokyo, IMF chief Christine Lagarde said heavily indebted European countries such as Greece and Spain should be given more time to cut their budget deficits.

"It takes away some of the tail risk attached to the euro that even the IMF is ready to give them a bit more time," Arne Lohmann Rasmussen, head of currency research at Danske Bank, said. "That's one of the reasons why we like to buy the euro on dips."

"And twisting the argument a bit, you could say that what the S&P did to Spain last night makes it more likely that eventually Spain will ask for a precautionary programme. That's what the market's looking for - when Spain will ask for help."

Investors have been on tenterhooks since the European Central Bank laid out a plan to buy the debt of countries like Spain last month that requires the governments to first request aid.

 Once Spain requests a bailout, the euro is likely to get a boost. But until that happens, the single currency is more likely to lose ground especially if pressure on peripheral bonds increases in the coming days.

 Italian three-year borrowing costs are expected to rise slightly at a bond auction on Thursday, another sign of returning nerves.

 Against the yen, the euro was down 0.1 percent at 100.56 yen, having earlier hit a ten-day low of 100.16 yen. Near term support is seen at 99.64 yen, the low struck on Sept. 27.

YEN INTERVENTION

 Speculation continued that the Bank of Japan may be set to take action to curb yen strength. BoJ Governor Masaaki Shirakawa said he will discuss the yen during talks on Japan's economic outlook at Wednesday's G7 meeting in Tokyo.

 "There's a lot of speculation over whether the Bank of Japan is moving in a more aggressive direction," Rasmussen said.

"They haven't been able to catch up with the Fed lately, in our opinion, so any comments from Japan on how they look at this issue could be attracting some attention in the market."

 The Australian dollar reversed earlier losses and climbed to its highest since Oct. 2 at $1.0288, after the country's employment rose more than expected.  "The Aussie is a risk currency, but there is an emerging view recently that some investors may be preferring the Australian dollar as a sort of reserve currency now that the euro is clearly unstable," Kimihiko Tomita, head of foreign exchange for State Street Global Markets in Tokyo, said.

Meanwhile, the Swedish crown fell to a three-month low against the euro after Swedish inflation data came in below expectations, supporting expectations a rate cut could be imminent.