The euro on Friday dropped to its lowest against the US dollar in nearly 17 months and tumbled to an 11-year low versus the yen, pressured by talk of a downgrade in the credit ratings of several euro zone countries later in the session. A senior euro zone government source said Standard & Poor's is set to downgrade the ratings of euro zone countries, but not Germany's.
The euro plunged to a low of $1.26240, its weakest level since late August 2010, on trading platform EBS. It last traded at $1.26641, down 1.3 percent on the day. The euro was on track for its third straight weekly loss, based on EBS data. The single euro zone currency also fell to 97.200 yen, its lowest since 2000 and last changed hands at 97.336, down 1.1 percent. The downgrade worries added to losses seen after Italy's three-year debt auction failed to match the success of a Spanish auction the previous day, reflecting the heavy refinancing load Rome faces over the next three months.
---- Euro falls to lowest vs yen since 2000
---- France's Baroin confirms French downgrade
---- Italy debt sale fails to live up to Spanish success
The downgrade "has been priced in for several weeks, but the market had been lulled into complacency over the holidays, and the new year began with a bounce in risk appetite, thanks partly to a good Spanish auction," said Samarjit Shankar, director of global FX strategy at BNY Mellon in Boston.
"But the Italian auction brought us back to earth and now we face the specter of further downgrades." Baroin on Friday said France, the region's second largest economy, would be cut by just one notch from its top AAA level. Earlier speculation that this would be the case helped the euro bounce off its low. Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey said a French downgrade by only one notch from AAA. "would be seen as something of a silver lining. We could see a sell the rumour, buy the fact reaction".
Dolan said technicals also provide a floor for the euro, as $1.26 marks the 76.4 percent retracement level of the broad move from below $1.19 to above $1.49. There were several bids earlier in the $1.26 area that served as support for the euro. "I don't think anybody really wants to go long the euro but there's been some pretty extended short-covering rally on the back of some compression in peripheral spreads," said Mark McCormick, currency strategist, at Brown Brothers Harriman, New York.
"Overall, people really want to sell the euro and this has provided fodder." The European Central Bank kept interest rates unchanged at 1.0 percent on Thursday and said its flood of cheap three-year loans was helping banks, adding that the euro zone economy was showing some signs of stabilisation. That had briefly helped the euro.
Indeed, analysts said some of the near half a trillion euros of three-year funds injected by the ECB last month probably went into supporting this week's debt auctions from Spain and Italy. Investors, however, are reluctant to enter into fresh long euro positions with so much uncertainty still surrounding the debt crisis and a precarious outlook for the euro zone economy.
Shaun Osborne, chief currency strategist at TD Securities in Toronto said the drivers of euro weakness are a lot more obvious this year than in 2010. "For one thing, there is more juice to be squeezed out of ECB monetary policy," Osborne said. "We expect the main refi rate to fall below 1.00 percent to 0.50 percent in the next few months as ECB policy makers respond to a jarring recession and huge deleveraging in the euro zone." Losses in the euro propelled the dollar index to its highest since mid-September 2010 at 81.784. It was last 81.548, up nearly 1 percent on the day. The dollar, meanwhile, was 0.3 percent higher against the yen at 76.900 yen.