The euro bounced back from its lowest level in more than two months against the dollar on Wednesday but worries remain about regional banks after warnings from ratings agencies fuelled concern over the effects of a deep recession in Eastern Europe.
Investors covered short positions after Societe Generale posted a quarterly net profit of 87 million euros ($110 million) which compared favourably with many rival banks that have posted large losses. But the euro stayed under selling pressure due to the financial crisis.
Moody's Investors Service threatened to downgrade euro zone banks with significant exposure to the weakening economies in Eastern and Central Europe, and Standard & Poor's said it may review emerging Europe bank ratings. "With growing credit concerns in Europe, investors seem to be continuing to unwind positions and securing cash in dollars," said Saburo Matsumoto, a senior manager at Sumitomo Trust Banking.
The euro fell as low as $1.2558 on trading platform EBS, its lowest since December 4, before regaining ground to around $1.2617, up 0.2 percent from US trading on Tuesday. The euro rose 0.2 percent to 116.50 yen. The market showed limited reaction to restructuring plans submitted by US auto giants as they offered no surprises, traders said.
General Motors Corp requested up to $30 billion and Chrysler LLC sought $5 billion in US government aid for their survival. The White House said on Tuesday it would carefully review the plans but said it was clear more would be required of the companies and stakeholders.
"The market is waiting for the US government's assessment of the automakers' plans. There is a risk of dollar selling but the dollar's reaction will depend on the review results," said Yuji Saito, head of the FX sales department at Societe Generale.
The dollar was steady at 92.32 after it rose to a more than one-month high of 92.75 yen on Tuesday. Investors will be monitoring US economic data including housing market and industrial production figures later on Wednesday for incentives.
US housing starts are seen to have fallen to an annual pace of 530,000 units in January from 550,000 in December and industrial output for the month is expected to have fallen 1.5 percent, according to Reuters polls. Also on Wednesday, Federal Reserve Chairman Ben Bernanke is scheduled to make a speech on the central bank's lending programmes and its balance sheet, while minutes from the Fed's January meeting will be released.
Traders said they would continue to watch the performance of share prices, but falls might not prompt yen purchases on risk aversion as much as in the past due to concerns about Japanese political turmoil and the weakening Japanese economy.
Japan's finance minister resigned on Tuesday after being forced to deny he was drunk at a G7 news conference, though the resignation may not save unpopular Prime Minister Taro Aso or the long-ruling party from voters' wrath. Japan's economy shrank sharply in the fourth quarter of 2008, confirming the world's second-biggest economy is in a severe recession, data showed this week. Tokyo's Nikkei share average fell 1.5 percent on Wednesday.