Euro pares gains in London

The euro pared gains against the dollar in thin trade on Tuesday after ratings firm Moody's put Portugal on review for a possible downgrade, reinforcing worries that the eurozone's debt crisis would persist well into 2011. The single currency also fell to a fresh lifetime low versus the Swiss franc as investor concerns over the eurozone periphery enhanced the safe haven status of the franc.
Moody's said it may downgrade Portugal's A1 rating by one or two notches after a review, citing concerns about the country's weak growth prospects and high borrowing costs, in the latest ratings-related jolt to a eurozone member. "The Moody's announcement on Portugal has knocked some of today's optimism out of the euro but these credit announcements are not completely out of the blue any more so the negative reaction is always going to be a little bit more dampened than six months ago," said Jane Foley, senior currency analyst at Rabobank.
Comments from a Chinese vice premier that China supports European Union efforts to calm global markets in the wake of Europe's debt crisis were enough to trigger a short-covering rally in holiday-thinned trade in Asia. "The comments show the euro failing is not acceptable for the Chinese," said Pierre Lequeux, head of currency management at Aviva Investors. "Supporting the euro is aimed at gaining more political leverage when negotiating with the United States," he added.
But Beijing's challenge to the EU to deal swiftly with its debt problems also highlighted the extent of concern over the still expanding crisis. The euro fell around 45 pips on the announcement before steadying at $1.3150, still up around 0.2 percent on the day. It made a brief show above $1.3200 in the Asian session, extending its rebound from Monday's trough of $1.3094, its lowest since December 2.
In a positive sign, the currency has managed to crawl back above its 200-day moving average, now at $1.3102. Many market players think pressure will remain on the euro as a number of investors fret that the debt crisis that has already engulfed Greece and Ireland could put Portugal and Spain under more pressure early next year. The euro slid to a record low against the Swiss franc of 1.2615 francs on trading platform EBS, its weakest since the euro's launch in 1999.
The dollar was flat at 83.65 yen with strong support seen around 82.80 yen, its low from last week. The Bank of Japan kept monetary policy steady on Tuesday as expected. The Aussie dollar rose 0.1 percent versus the US dollar to $0.9950, showing little reaction as the Reserve Bank of Australia confirmed it was in no hurry to raise rates. Spain sold 3.88 billion euros in treasury bills relatively easily on Tuesday, in its last funding exercise of the year, but eurozone debt worries are likely to persist into 2011.
"It seems clear that from January the debt problems will still be very much there. These countries need to raise a lot of money early next year," said Beat Siegenthaler, currency analyst at UBS in Zurich. "Many investors are using euro/Swiss as a gauge for the concerns about the problems in the eurozone periphery. Sovereign risk is still weighing on the euro into year-end," said Valentin Marinov, currency strategist at CitiFX.