The euro fell against the dollar as Thursday trading opened in Asia after Standard & Poor's downgraded Spain's credit rating, saying the country's political institutions have a declining capacity to deal with the severe challenges posed by the current economic and financial crisis.
The euro last traded down 0.2 percent at $1.2863 in New York on Wednesday, which was early Asian trade on Thursday. The session low posted at $1.2860 and the session high was at $1.2876 in the first 15 minutes of trade on the day. Standard & Poor's on Wednesday cut Spain's sovereign credit rating by two notches to BBB-minus, citing a deepening economic recession that is limiting the government's policy options to arrest the slide.
"This is weighing on the euro," said Kathy Lien, managing director at BK Asset Management in New York. "A downgrade from S&P could be followed by a downgrade from Moody's, and while S&P did not downgrade Spain to junk, Moody's might. If Moody's goes to junk status, that's even more significant, and this adds to the pressure on Moody's to make a decision." Lien said the downgrade could lead to higher bond yields in Spain and push the government closer to asking for a bailout.
"The euro may fall to one-month lows around $1.28," she said. The euro had advanced against the dollar for most of the day on Wednesday after a two-day decline but uncertainty about whether debt-ridden Spain would request a bailout and Greece would get more money from its lenders had limited gains.
Any gains were eroded in the final minutes of Wednesday trade. European Union leaders are scheduled to meet at the end of next week, with Spain expected to be a focus of discussion. Euro zone finance ministers delivered a united defence of Spain at a meeting this week, saying it did not need a bailout for now. A Spanish bailout deal is seen by most traders as positive for the euro because it would activate the European Central Bank's bond-buying program aimed at reducing borrowing costs for debt-ridden countries.