SYDNEY/TOKYO: The euro was bruised on Friday after Standard & Poor's hit Spain with a two-notch credit rating downgrade, while the yen could go either way depending on the scale of easing delivered by the Bank of Japan later.
The euro briefly skidded to $1.31766 from $1.3236 late in New York, before recovering much of those losses to stand at $1.3205, helped by buying against the yen.
The single currency stood at 107.02 yen, little changed from New York. Standard & Poor's cut its credit rating on Spain to BBB-plus from A and gave it a negative outlook, warning it expects the government's budget deficit to deteriorate even more than previously thought due to economic contraction.
"This could boost Spanish bond yields again later today to above the six percent mark. The euro could fall further during the European session," said a trader at a Japanese bank.
S&P also affirmed its BBB-plus rating for Ireland but said its negative outlook meant there is a one-in-three chance it could cut the rating in 2012 or 2013.
With the euro under renewed pressure, the dollar index popped up to 79.106, from a 3-1/2 week low of 78.823 plumbed on Thursday.
The greenback though was little changed on the Japanese currency at 81.01 yen versus 80.95 in New York.
According to sources familiar with the Bank of Japan's thinking, the central bank is likely to boost asset purchases by up to 10 trillion yen ($123 billion) and may also extend the maturity of government bonds it targets to around three years.
However, there is no consensus yet within the central bank on whether it should increase its 30 trillion yen asset-buying programme by the usual 5 trillion yen increment or by double that amount - as it did in February - for greater market effect.
"Traders are preparing to sell the dollar/yen if it's five trillion yen and to buy if it's 10," said a trader at a Japanese bank.
The dollar has a strong support from the cloud top of its weekly Ichimoku charts at 80.42. Another pivotal point will be 80.10, a 50 percent retracement of its rally from February to March.
The Aussie last traded at $1.0360, having slipped from Thursday's session high of $1.0399 in sympathy with the euro's decline.
Later in the day, Italy will sell up to 6.25 billion euros of bonds. The market is pinning its hopes on support from domestic banks, which has helped Italy push auctions through even when spiralling concerns last November threatened to tip the country into a Greek-style debt crisis.
"A poor auction will likely put EURUSD back under downward pressure," BNP Paribas analysts said in report.