The euro edged up from a two-month low on Wednesday, finding support after a massive sell-off sparked by the eurozone debt crisis and heightened tensions in the Korean Peninsula. The common currency ticked up on light buying after its fall of 1.9 percent to as low as $1.3359 on electronic platform EBS prompted short-covering.
As the low represented a 38.2 percent retracement of the euro's rally this year to $1.4283 in early November from $1.1876 in June, the euro may have found short-term support there, said Sumino Kamei, a senior analyst at the Bank of Tokyo-Mitsubishi UFJ. The euro climbed 0.2 percent to $1.3395 on the day, shrugging off the news that Standard and Poor's had downgraded its sovereign rating on Ireland.
"The fact that the euro didn't fall further on the downgrade suggests that the euro's drop may be over at least for the short term," Kamei said. Market players' risk aversion also eased as the Korean won recovered from lows and regional shares fared better than some investors had feared a day after North Korea fired scores of artillery shells at a South Korean island.
While few traders dare to predict what North Korea will do next, many are leaning to the view that the incident will not have a long-lasting impact on financial markets unless tensions escalate sharply. "I think this is already over as a market factor," said a trader at a Japanese brokerage house, noting that sporadic attacks from Pyongyang in the past have tended to only affect markets for a day or two.
Easing risk aversion also helped the Australian dollar gain 0.7 percent from late US levels to $0.9795, a halfway recovery from Tuesday's fall to a four-week low of $0.9708. The dollar was little changed against the yen at 83.20 yen, with its 55-day moving average, now at 82.74, seen as a floor and with the 90-day moving average, at 83.82, seen as a ceiling in the near term.
Traders said market liquidity was lighter than usual due to a US market holiday on Thursday, which means prices can be exaggerated in either direction. Some traders said the euro still had a greater risk on the downside given worries Spain and Portugal may have to follow Ireland in seeking emergency aid to stave off debt crises.
For now, the euro has key support in the $1.3333 area, its August high. A break of that level could pave the way for a retest of $1.3232, a 61.8 percent retracement of its August-November rally, before $1.3000. On the flipside, the dollar index is tackling major resistance at 79.55-80.05. It fell 0.2 percent to 79.51 on the day, but was still not far from an eight-week high of 79.743 plumbed on Tuesday.
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