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Tue 20 Sep 2011 08:59 AM

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Euro tumbles on Italy downgrade, Greece worries

Currency hit session low after news that Standard and Poor's cut its debt rating on Italy

Euro tumbles on Italy downgrade, Greece worries
The dollar could be hurt if the US Federal Reserve adopts bolder easing steps than markets are expecting

The euro slid sharply on Tuesday, moving closer to a seven-month low against the greenback after Standard and Poor's cut its debt rating on Italy and as investors fret over whether Greece can borrow badly needed cash from international lenders.

These worries encouraged investors to exit a range of riskier assets, with the growth-linked Australian dollar briefly hitting a one-month low and emerging economy currencies such as the Brazilian real coming under heavy pressure.

The single European currency hit a session low of $1.3599 after the Italy news, but trimmed some losses as traders came to terms with the rating cut.

"The downgrade is clearly negative for the euro, but I don't think anyone at this stage is particularly surprised or shocked that it has happened," said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ in Tokyo.

"The downtrend in the euro is likely to continue, but it won't be a simple slump - seems like traders are short euro, but every positive bit of news triggers solid short-covering."

It was trading 0.3 percent lower at $1.3644, edging back toward a seven-month low of $1.3495 hit last week. A break of that level could open way for a test of $1.3410, the 50 percent retracement of its rise from June last year to May this year.

S&P's rating cut on Italy has preceded any move by Moody's, which had been expected to be the first major credit ratings agency to downgrade the country.

The common currency had found brief solace in late US trade on Monday on after Greece said it was near a deal with its international lenders though investors were far from convinced.

Greek Finance minister Evangelos Venizelos said the country's conference call with its international lenders was satisfying and would continue late on Tuesday but he added some work still needed to be done.

Against the yen, the euro slid 0.3 percent to 104.45 yen, a stone's throw from a 10-year low of 103.90 yen hit last week.

Fears of global economic turmoil given the mess in Europe and a slowdown in the United States are also prompting market players to sell risk assets such as stocks, commodities while emerging economy currencies such as the Korean won and the Singapore dollar, which have less liquidity than the US dollar, all declined on Monday.

The Australian dollar fell 0.6 percent to a fresh one-month low of $1.0148. But it recovered to trade a little above late New York levels at $1.0235 after minutes from the Reserve Bank of Australia September policy meeting indicated the bank is still concerned over the medium-term inflation outlook.

Although the market has priced in large interest rate cuts by the end of the year, the RBA noted that a range of technical factors meant that the market pricing was not necessarily a true reflection of expectations for monetary policy.

Weakness in Asian currencies, together with the softer euro helped the dollar index - a gauge of the greenback's performance against a basket of major currencies - hover at 77.228, within the shouting distance of the 7-month peak of 77.784 hit last week.

The dollar could be hurt if the US Federal Reserve adopts bolder easing steps than markets are expecting on Wednesday when it ends a two-day meeting. But many analysts suspect that relatively high US inflation will hinder the US central bank from adopting large-scale easing.

"A high CPI reading hardly justifies quantitative easing. But if the Fed doesn't do what people are already expecting that could unsettle markets, so it will have to just do what is expected," said Koji Fukaya, chief currency strategist at Credit Suisse in Tokyo.

The Fed is expected to try to push already low long-term interest rates even lower this week by tilting toward longer-duration bonds in its portfolio, a move known as Operation Twist.

The Japanese yen was little changed at 76.60 yen per dollar, not far from a record high of 75.94 yen hit last month, though wariness about the possibility of intervention from Japanese authorities kept it in check.

"Putting aside the question of whether the yen is a safe asset, Japanese investor repatriation is likely to support the yen for now, as both the euro and the dollar have only negative factors," said Makoto Noji, strategist at SMBC Nikko Securities.

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