The euro extended losses and commodity currencies fell on Wednesday after China raised rates for the third time this year, driving investors to shed exposure in riskier assets in a market already shaken by Portugal's rating being cut to junk. Investors cut exposure to stocks, commodities and growth-linked currencies, pushing the Australian dollar down 0.3 percent to $1.0660. Analysts, though, said the sell-off was a knee-jerk reaction and would be limited.
The latest move increases China's benchmark one-year lending rate to 6.56 percent, and lifts its benchmark one-year deposit rate to 3.5 percent. It weighed on an already soft euro, dogged by renewed concerns of sovereign debt contagion after Moody's downgraded Portuguese debt by four notches to Baa2, saying the country may need a second round of official financing before it can return to capital markets.
The euro was last down 0.7 percent at $1.4322, close to it's lowest level in a week with decent-sized offers cited from $1.4280 to $1.4300. One-week implied vol rose to as high as 12.70 percent from 11.25 percent on Tuesday while risk reversals showed a greater skew for euro's downside. This meant demand to hedge against any weakening in the euro was rising with investors betting on more downside risks for the euro than any upside.
The one-year risk reversal was at 2.70 in favour of euro puts while the one-month risk reversals were trading at 2.30, compared with 2.1 on Tuesday. The euro lost ground against the Swiss franc, shedding 0.6 percent to trade at 1.2064 francs and traders said the break of support around 1.2180 francs triggered more selling in a move that unwound about a third of last week's 4.3 percent rally. Near term support is seen around 1.2032-the low struck on June 30.
The US dollar benefited from uncertainty in the market and could enjoy further support if Friday's US payrolls data suggests the US economy is not doing as badly as feared. It last traded flat against the yen at 81.05 yen but the pair continued to frustrate dealers as it kept trading within the well-trodden range roughly between 79.80 and 81.30.