Tokyo: The euro slid sharply on Tuesday, moving closer to a seven-month low after Standard and Poor’s cut its debt rating on Italy and as sources said two Chinese state banks had stopped trading currency swaps with some European lenders.
Ongoing concerns on whether Greece will be able to borrow cash from international lenders forced investors to sell riskier assets, with the growth-linked Australian dollar hitting a six-week low and emerging economy currencies such as the Korean won dumped across the board.
“The downgrade is clearly negative for the euro, but I don’t think anyone at this stage is particularly surprised or shocked that it has happened,” said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ in Tokyo.
S&P’s rating cut on Italy has preceded any move by Moody’s, which had been expected to be the first major credit ratings agency to downgrade the country.
Bank of China , a big market-maker in China’s onshore foreign exchange market, has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, sources said.
“Everyone thought this could happen, but it’s the first news item that states things this clearly. We have to see if other banks follow suit, but this is likely to push the euro and French financials sharply lower later today,” said a trader for a Japanese brokerage.
The European banks include French lenders Societe Generale, Credit Agricole and BNP Paribas , and Bank of China halted trading with them partly because of the downgrading from Moody’s. Another Chinese bank said it had stopped trading yuan interest rate swaps with European banks.
The euro changed hands 0.5% lower at $1.3613 , edging back towards a seven-month low of $1.3495 marked last week. A break of that level could open way for a test of $1.3410, the 50% retracement of its rise from June last year to May this year.
Tom Fitzpatrick, a managing director and global head of CitiFX Technicals told Reuters Insider TV he was sceptical about both the mid-term and long-term outlook for the euro.
“We could see the dollar outperform the euro not only for a couple of months, but possibly for a couple of years,” said Fitzpatrick, adding that the euro could drop below $1.30 before year-end and move towards parity one to two years from now.
The common currency had found brief solace in late US trade on Monday after Greece said it was near a deal with its international lenders though investors were far from convinced.
Greek finance minister Evangelos Venizelos said the country’s conference call with its international lenders was satisfying and would continue late on Tuesday but he added some work still needed to be done.
Against the yen, the euro slid 0.5% to 104.24 yen , a stone’s throw from a 10-year trough of 103.90 yen hit last week.
FED IN FOCUS
Fears of global economic turmoil given the mess in Europe and a slowdown in the United States are also prompting market players to sell risk assets such as stocks and commodities, while emerging economy currencies such as the Singapore dollar, which have less liquidity than the U.S. dollar, all declined on Monday.
The Aussie dollar fell 0.2%, at one point hitting a six week trough of $1.0148 . It staged a brief rally to $1.0243 after the Reserve Bank of Australia (RBA) reiterated it was best to keep rates steady given the murky global outlook, paring market pricing of aggressive rate cuts.
Weakness in Asian currencies, together with the softer euro helped the dollar index -- a gauge of the greenback’s performance against a basket of major currencies -- hover at 77.349 , within shouting distance of its 7-month peak of 77.784 hit last week.
The dollar could be hurt if the US Federal Reserve adopts bolder easing steps than markets are expecting on Wednesday when it ends a two-day meeting. But many analysts suspect that relatively high US inflation will hinder the US central bank from adopting large-scale easing.
“A high CPI reading hardly justifies quantitative easing. But if the Fed doesn’t do what people are already expecting that could unsettle markets, so it will have to just do what is expected,” said Koji Fukaya, chief currency strategist at Credit Suisse in Tokyo.
The Fed is expected to try to push already low long-term interest rates even lower this week by tilting towards longer-duration bonds in its portfolio, a move known as Operation Twist.
The Japanese yen was little changed at 76.53 yen per dollar , not far from a record high of 75.94 yen hit last month, though wariness about the possibility of intervention from Japanese authorities kept it in check.