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Euro holds after Italian downgrade

Friday, July 13 12:34:38

The euro hovered near two-year lows against the dollar today 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). (C ) Reuters