The euro fell on Friday after Moody's cut Ireland's rating to just above 'junk' status, keeping the single currency zone's debt problems in the limelight, though losses were likely to be offset by bids from sovereign buyers. Also helping cap losses was the diverging outlook for monetary policy in Europe and the United States.
Several top Federal Reserve officials have sounded relaxed about inflation, bolstering the view the Fed is still some way from normalising its ultra-loose monetary policy. The European Central Bank raised rates by 25 basis points last week and investors are pricing in chances of two more rate increases before the end of this year.
"In the short term, interest rate differentials will still be the key driver for the euro/dollar despite these downgrades which have been priced in by the market," said Paul Robson, currency strategist, at RBS Global Banking. Moody's cut Ireland's sovereign rating by two notches to Baa3 and left the outlook negative, citing an expected deterioration in the government's financial strength and a weaker economic growth outlook.
The euro slipped 0.2 percent on the day to $1.4460, well below a 15-month high of $1.4521 touched earlier this week. Traders said Asian central banks had bids at $1.4415/20 and then at $1.4385/90. On the upside, an option barrier lies at $1.4525 and there are stops above that level, going up to $1.4550, traders said. The euro showed little reaction to eurozone inflation numbers which surprised on the upside, backing views that the ECB will continue to raise rates in coming months.
The dollar slipped 0.3 percent to 83.20 yen, but losses were limited, with traders saying Japanese life insurance companies have been buying the dollar and the euro at its lows with stops in the dollar/yen pair building below 83 yen. The dollar was little changed versus a currency basket. Market players said the euro could find the going tough above $1.45 given concern about sovereign debt problems, which have escalated this week as concerns about a possible Greek restructuring gather pace.