Euro subdued after Italy rating

The euro hovered near two-year lows against the dollar on Friday after a Moody’s downgrade on Italy added to an already bearish stance on the single currency, while commodity currencies rose on growth figures from China that met expectations. Despite the downgrade, Italy managed to auction three-year debt at lower borrowing costs, helping the euro hold steady on the day at $1.2202. The single currency stayed within sight of a two-year trough of $1.2166 hit on trading platform EBS the previous day and was on track for its second straight week of losses. It fell to $1.2181 in the Asian session after Moody’s cut Italy’s credit rating by two notches. Moody’s warned it could further cut the new Baa2 rating, which stands just two notches above junk, if Italy’s access to debt markets dried up. “The auction was not too bad but the bigger news is the double notch downgrade rather than an auction that has gone okay,” said Derek Halpenny, European head of FX research at Bank of Tokyo Mitsubishi. “Disappointing economic growth, coupled with fragile investor confidence and high peripheral yields remain ahead for the rest of the year. Our target is for the euro to drift to $1.15 in three to six months time.” Near-term support for the euro is expected around $1.2151, the June 29, 2010 low, with another support level around $1.1876 a low struck on June 7, 2010. There was some talk of an option barrier in the euro at $1.2150. That suggests options players would bid for the euro if it drops close to that level, offering the single currency some support. The euro has lost 5.7 percent so far this year, already exceeding the losses it chalked up in 2011, with losses accelerating after last week’s deposit and refinance rate cuts by the European Central Bank (ECB). The unprecedented cut to zero in the deposit rate means banks will earn nothing for parking excess funds with the ECB, and it will encourage investors to sell the low-yielding euro and buy higher-yielding riskier currencies. Analysts said this left the euro vulnerable in times of both improving and deteriorating market sentiment. Many market players said the euro’s steady drift lower meant it could rebound in coming weeks if thin summer liquidity leads to volatile trading conditions, but its outlook remained weak. “While there is a risk of a short squeeze that could push the euro higher, we expect more selling into a bounce. We also expect the ECB to lower rates and launch unconventional measures in coming months, all of which will keep the euro under pressure,” said Beat Siegenthaler, currency strategist at UBS. The single currency also dropped to a four-month low against the Norwegian crown of 7.4325 crowns, and a record low against the Canadian dollar of C$1.2391. Chinese growth While the euro hovered near two-year lows against the dollar, the Australian dollar rose 0 .4 percent to $1.0171 , boosted by data showing that China’s economy grew 7.6 percent in the second quarter from a year earlier. China’s economic health is always a key driver for Australia because the Asian powerhouse is Australia’s single largest export market. Though the lowest reading in three years, it was exactly in line with expectations and came as a relief to investors, who had been worried about the risks of a weaker result especially at a time when activity in the U.S. and Europe is slowing. The safe-haven dollar held near a two-year peak hit against a basket of major currencies the previous day. The dollar index stood at 83.576, having climbed to 83.829 on Thursday, the highest level since July 2010. Against the yen, the dollar held steady at 79.25 yen.