Euro retreats after Greece downgrade renews concerns

London: The euro retreated on Monday as downgrade of Greece's debt to junk status by ratings agency Moody's renewed concerns about euro zone debt, dampening sentiment and cutting short a rally in the currency.

Moody's slashed Greece's rating by four notches, citing "macroeconomic and implementation risks" in the country's draconian austerity programme and renewing persistent doubts about Greece's ability to repay its debt.

Worries about Spain also increased as Spanish Treasury Secretary Carlos Ocana acknowledged on Monday that some Spanish banks faced a liquidity freeze in the interbank market.

This put a stop to the euro's impressive run over the past few sessions when a rally in equity markets prompted investors to take profits on hefty short positions, leading the single currency to stall just shy of resistance at around $1.23 (Dh4.51).

"Yesterday we had concerns about Spain and on top of that the Greece downgrade and that is weighing on the euro now," said Johan Javeus, currency strategist at SEB in Stockholm.

"The Greece downgrade highlighted that these problems are quite severe and it is difficult to see the liquidity problems in Spain improving and I think the euro will struggle going forward."

SEB technical analysts said, however, that $1.2045 should provide solid support for the euro. That level is close to lows hit on Friday before the currency's solid rally on Monday when it rose close to $1.23.

The euro on Monday closed above its 14 day moving average for the first time since mid-April.

At 7.17am GMT, the euro was down 0.3 per cent against the dollar at $1.2182.

The Australian dollar fell 0.7 per cent to $0.8522, pulling back from Monday's one-month high as greater risk aversion caused investors to cut exposure to higher-yielding currencies.

Australian worries

Minutes of an Australian central bank meeting that said interest rates could be left on hold in the near term also hit the Aussie. Policymakers expressed concerns about the debt problems in the euro zone.

Yield spreads between peripheral euro zone government bonds and core German Bunds widened yesterday after the Greece downgrade and traders said the market looked vulnerable to euro negative news.

"Whether the bounce in the euro from $1.19 to $1.22 is more than a brief relief bounce remains open for debate but the sharp reaction to the rating downgrade overnight suggests that sentiment is still extremely fragile," Matthew Strauss, senior currency strategist at RBC Capital wrote in a note.

Traders said any revival in risk appetite may check losses in the near term, however.

Resistance is still around a Fibonacci retracement level at $1.2301, which is 23.6 per cent of the euro's move from an April 14 high to its June 7 low.

The euro fell 0.7 per cent on the yen to 111.01 yen. The US dollar lost 0.4 per cent to 91.16 yen.