Euro hampered by Spain; AUD bruised by rate cut

SYDNEY Wed Oct 3, 2012 4:44am IST

An employee checks an Euro note at the Bank of Taiwan head office in Taipei May 10, 2010. REUTERS/Pichi Chuang

An employee checks an Euro note at the Bank of Taiwan head office in Taipei May 10, 2010.

Credit: Reuters/Pichi Chuang

SYDNEY (Reuters) - The euro started trade on Wednesday slightly on the back foot after Spain dented hopes that it would soon ask for a bailout, while the Australian dollar threw a fit on prospects of more domestic interest rate cuts following Tuesday's easing.

The single currency was at $1.2917, having retreated from a one-week high of $1.2968 after Spanish Prime Minister Mariano Rajoy said a request for European aid was not imminent.

The pullback in the euro saw the dollar index .DXY edge off a session low of 79.479. It was last down 0.1 percent at 79.748.

Still, the common currency remained well above a three-week trough of $1.2804 plumbed on Monday. It appeared to be carving out a trading range while markets wait for a move from Spain that would trigger the European Central Bank's recently announced bond-buying program.

The market was also waiting for Spain's credit rating review by Moody's, which said on Tuesday it would announce the results some time this month. Spain stands to lose its investment grade rating if Moody's decide to downgrade the country.

Traders said the resilience in the euro could partly be attributed to buying against the Australian dollar, which fell pretty much versus every other major currency.

Investors dumped the Aussie dollar after the Reserve Bank of Australia (RBA) on Tuesday cut its cash rate by 25 basis points to 3.25 percent, the lowest in three years, and left the door open for more easing.

In justifying the cut, the RBA said China's economic slowdown, falling export prices and a high local dollar all dimmed the economic outlook at home.

Further downside for the Aussie could be limited while the Federal Reserve and European Central Bank are busy trying to stimulate their own economies as well, diminishing the allure of both the dollar and euro.

"The AUD is not going to fall much further while the risk-friendly environment is in place but it remains a sell on rallies tactically and vulnerable to any deterioration in sentiment," analysts at Societe Generale wrote in a client note.

The euro soared 1.2 percent on the Aussie to a 3-1/2 month high of A$1.2603, putting more distance from a record low around A$1.1597 plumbed two-months ago.

Against the greenback, the Aussie posted its biggest one-day fall in more than two months, shedding nearly 1 percent to a low of $1.0252. Investors also sold the Aussie against the yen, driving it to a four-week low of 80.05 yen.

Australia's trade data due at 0130 GMT will be closely watched to see if exports to China, its biggest trading partner, had been hit by softer growth there.

In Europe, investors will get the latest reading on the services sector of the region's major economies. Further signs of weakness could add more pressure on the ECB to cut interest rates on Thursday.

Still, officials have expressed enough concern about euro zone inflation to convince financial markets they will hold off another cut in interest rates, already at a record low of 0.75 percent.

"The ECB interest rate decision may instil a bearish outlook for the euro as we anticipate President Mario Draghi to sound more dovish this time around," said David Song, currency analyst at DailyFX.

"The central bank head may now look to target the benchmark interest rate in an effort to stem the downside risks surrounding the region."

(Editing by Wayne Cole)

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