The euro edged higher and held above a three-week low against the dollar on Tuesday, but its outlook was clouded by concerns over Spain's fiscal woes and uncertainty over the timing of a possible aid request by Madrid. The single currency was helped by data the previous day showing US manufacturing grew slightly in September for the first time since May, a reading that weighed on the safe haven dollar and lent support to risky assets.
The euro rose 0.2 percent to $1.2914, pulling away from Monday's low near $1.2804 on trading platform EBS, its lowest level in about three weeks. Spain remained a focal point, with traders waiting for Madrid to seek a bailout and trigger the European Central Bank's bond buying programme, a scheme aimed at lowering the borrowing costs of indebted euro zone countries.
In addition, Moody's has yet to announce its review of Spain's rating, which could see Madrid's credit standing cut to junk status. The euro's near-term outlook could hinge on whether Spain makes an early request for a bailout, or is forced by the market into seeking such aid, said Sim Moh Siong, FX strategist for Bank of Singapore. "If Spain requests proactively, I think the euro would have a lot more upside, perhaps to $1.33," he said.
European officials said on Monday that while Spain is ready to request a euro zone bailout for its public finances as early as next weekend, Germany has signalled that it should hold off. Gains in the euro could be limited ahead of a Eurogroup meeting on October 8, given the risk that the gathering may reveal rifts among European officials regarding Spain, said Daisuke Karakama, market economist for Mizuho Corporate Bank in Tokyo.
"If we see headlines that highlight the type of disagreement that you often see, the euro could fall towards levels such as $1.27 or $1.26," he said. Against the yen, the euro edged up 0.3 percent to 100.83 yen. The safe haven yen slipped broadly, with the dollar edging up 0.1 percent to 78.08 yen.
The Australian dollar fell to a one-month low versus the dollar and slid against the euro after the Reserve Bank of Australia (RBA) cut interest rates by a quarter point to a three-year low of 3.25 percent. The Aussie dollar fell 0.5 percent to $1.0307, having touched a low of $1.0298 at one point, its lowest level since early September. The RBA rate cut helped lift the euro against the Australian dollar. The euro climbed 0.7 percent to A$1.2523.
While the rate cut was not a complete surprise, many analysts had thought that Australia's central bank would wait until November to lower interest rates. "I think everybody knew that this was going to be a close decision ... This isn't going to be a shock to markets. I'm looking at this statement as being not too alarmist," said Daniel Martin, Asia economist for Capital Economics in Singapore. Interest rate derivatives, however, showed investors were looking for further interest rate cuts. Overnight index swaps, which show where the market thinks the cash rate will be over time, have 2.75 percent inked in on a 12-month horizon.
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