The euro held above a two-month low versus the dollar on Tuesday but was seen vulnerable to further selling as the threat of eurozone sovereign downgrades hung over the currency and kept investors wary. Short covering helped the euro rebound modestly after it failed to break below a reported barrier at $1.3150, but traders said there remained a clear bias to sell on any bounce.
The single currency was up 0.1 percent at $1.3200, having hit its lowest since early October at $1.3160 on trading platform EBS in the Asian session. Option-related bids were reported ahead of $1.3150, with support at the October low of $1.3145. Traders highlighted short-term stop-loss orders at $1.3250 and good selling interest above. Against the yen, the euro slipped to a two-month low of 102.42 on EBS before steadying at 102.75. Investors took some encouragement from lower yields at an auction of Spanish short-term debt, while a survey showed German investor sentiment rose unexpectedly in December though worries about the severity of the region's debt crisis remained.
Comments from France's candidate for a seat on the European Central Bank's Executive Board, Benoit Coeure, who said the ECB may need to step up its bond-buying to help reduce borrowing costs for some states, were also euro-positive. Moody's said on Monday it intends to review the credit ratings of all 27 European Union states in the first quarter of 2012, while another ratings agency, Fitch, said pressure on their ratings had risen after last week's EU summit yielded no "comprehensive" crisis solution.
Standard & Poor's, the other major rating agency, already has 15 euro zone states on watch for a possible downgrade. Although IMM speculative positioning data suggested strongly negative sentiment towards the euro, the single currency could gain short-term support as investors take profits on or cover those positions.
Some support was also garnered from a solid start to the new short-term debt issuance programme of the European Financial Stability (EFSF) Bailout Fund, which sold nearly 2 billion euros of three-month bills at a yield of 0.22 percent. Pressure on the euro and heightened risk aversion increased the dollar's safe-haven appeal, lifting the dollar index to 79.651, its highest this month, before it dropped back to 79.478. The risk-sensitive Australian dollar was up 0.4 percent at $1.0118, having earlier shed more than 1 cent to a two-week low of $1.0030.