New York: Ratings downgrades for Italy and Spain knocked the wind out of the euro on Friday, and traders said anxiety about Europe's economy and fragile banks will likely continue to hobble it in the weeks ahead.
Higher-yielding, growth-sensitive currencies such as the Canadian and Australian dollars should fare better, especially after data showed US hiring rose more than expected last month, easing some concern about the world's biggest economy.
If the view that the United States can avoid recession takes hold, investors may renew borrowing US dollars at near-zero interest rates to fund riskier but more lucrative trades in other currencies and assets, traders said.
That's a practice that fell out of favour in August and September as markets fretted over slower US growth and a worsening Eurozone sovereign debt and banking crisis. The debt crisis continued to hurt the euro, which slipped 0.4 per cent to $1.3373, off a $1.3524 session high.
While it was on track for a slender weekly gain against the dollar — its first in the last three — the euro was still rooted in a downtrend that began at $1.4548 on August 29.
Euro
The euro relinquished earlier gains after Fitch cut the credit ratings of Italy and Spain — the third and fourth largest Eurozone economies — citing a worsening Eurozone debt crisis and fiscal situation in both countries.
In addition, Moody's Investor Service, another ratings agency, put Belgium's ratings on review for a possible downgrade, citing long-term funding risks and high public debt.
"This brings the sovereign debt crisis back into focus and raises the risk for contagion," said David Song, currency analyst at DailyFX in New York. "As they try to gain time, things are getting worse."
Yen
The dollar rose against the yen and the Swiss franc, up 0.2 per cent to 76.85 yen and up 0.8 per cent to 0.9280 francs. Euro pressure should continue
Italy and Spain have faced higher borrowing costs as investors worry about their finances, and that has put pressure on European banks which hold their sovereign bonds. The euro may get a boost if Eurozone leaders can cobble together a plan today to recapitalise banks facing hefty losses.
But Brown Brothers Harriman strategist Mark McCormick said the prospect of a Eurozone recession and interest rate cut were gaining traction after the ECB announced new funding plans to stabilise banks and the Eurozone economy.
"That means the euro probably doesn't get much momentum even on good news," he said. "A Eurozone recession is still possible and the ECB probably cuts rates before 2012."
Jens Nordvig, head of G10 currency strategy at Nomura, said the euro will remain under pressure in the fourth quarter and should hit $1.30 before the end of the year.
Pound
Sterling may struggle as well, he said. Though it rose 0.7 per cent to $1.5545 on Friday, it remained near Thursday's 14-1/2-month low beneath $1.53, hit after the Bank of England said it would pump another £75 billion (Dh435 billion) into the economy.
While US interest rates are set to remain at zero into 2013, McCormick said the data showing 103,000 new jobs added in September at least suggests the US economy "is not in as bad shape as some people think".
Data on Friday showed speculators cut their bets in favour of the US dollar in the week to October 4.
