The euro regained some ground on Wednesday as short-term players covered short positions ahead of a European Central Bank policy meeting, following a steep fall against the Swiss franc and the dollar after Moody's slashed Portugal's credit rating to junk.
The single currency was lifted by stop-loss buying as well as broad weakness in the dollar, which fell prey to profit-taking after Tuesday's short squeeze with Asian central banks selling it while hedge funds liquidated their longs in dollar/yen. While Portugal's downgrade reignited lingering fears about other highly indebted peripheral eurozone countries, a broad flight from risk was averted with stocks and commodities advancing and supporting the Australian and New Zealand dollars.
"The Portugal news doesn't really change fundamentals. That's why the market's reaction was limited to one day. If we were talking about Spain, now that would be a totally different story," said Koji Fukaya, director of global foreign exchange research at Credit Suisse Securities in Tokyo. The European single currency popped above the top of the Ichimoku cloud, nudging 0.2 percent higher to $1.4460, after dropping about a full cent to a low around $1.4395 on Tuesday.
The session low, a Fibonacci support representing a 38.2 percent retracement of the June 27 to July 4 rally, is likely to hold for now. The next support level is seen at $1.4339, a 50 percent retracement. The dollar also softened versus the yen, shedding 0.3 percent to as low as 80.81 yen, as hedge funds liquidated some of their longs and exporters sold, with loss-cut selling triggered around 80.90-80.80 yen.
The pair continued to frustrate dealers as it kept trading within the well-trodden range roughly between 79.80-81.30. Meanwhile, commodity currencies like the Australian dollar held up pretty well despite Portugal's downgrade. Talk of bids from Asian central banks and local exporters around $1.0660/70 for the Aussie appeared to be providing a floor.
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