Euro Briefly Extends Losses vs Dollar after S&P Downgrade

The euro extended losses against the dollar on Friday after Standard & Poor's downgraded the ratings of several euro zone countries including France, Spain, Italy, and Austria.

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S&P, however, kept Germany's triple-A rating unchanged, with a stable outlook.

A senior euro zone government source said Standard & Poor's was set to downgrade the credit ratings of several euro zone countries later on Friday, but not Germany's.

The euro

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[EUR=  Loading...      ()   ] fell further after the downgrade to tumbled to a low of $1.26540, after earlier touching its weakest level since late August 2010.

The euro

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[EURJPY=X  Loading...      ()   ] also fell 0.9 percent to 97.55 yen, not far from this week's 11-year low of 97.28.

Earlier worries from the widely anticipated downgrade 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.

The euro was on track for its sixth straight weekly loss.

However, reports the credit rating of France, the region's second largest economy, would be cut by just one notch from its top triple-A level helped the euro bounce off its low.

"If France is downgraded by only one notch from triple-A, that would be seen as something of a silver lining. We could see a sell the rumor, buy the fact reaction," said Brian Dolan, chief analyst at Forex.com in Bedminster, New Jersey.

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.

"We've been fearing a downgrade for months now and bond markets have already priced it in," he said. "French, Spanish, Italian debt has been trading based on lower ratings for some time. So the euro shouldn't collapse on any statement today. We may have already seen about 70 percent of the move."

"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 dollar

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[JPY=  Loading...      ()   ] was flat against the yen at 76.93 yen.

The European Central Bank kept interest rates unchanged at 1 percent on Thursday and said its flood of cheap three-year loans was helping banks, adding that the euro zone's economy was showing some signs of stabilization.

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 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.