Italy downgrade keeps euro near two-year lows

The euro fell close to two-year lows today after Moody’s Italy downgrade added to a bearish stance on the common currency, while commodity currencies went up on growth data from China which met expectations.

The euro dropped to $1.2190, near its two-year low of $1.2166 hit on Thursday on the EBS trading platform and on course for its second consecutive week of losses. It went down to $1.2181 during Asian trading on the back of Italy’s credit rating being cut by two notches by Moody’s.

Moody’s also warned that it could reduce the new Baa2 rating further if Italy is no longer able to access debt markets. The downgrade’s timing was particularly bad, arriving just hours before Italy goes to the debt market in order to raise bonds worth 5.25bn euros which have maturities of as long as 11 years. A massive jump in yields may put additional pressure on the single currency as it would ignite the debt contagion risk in the eurozone.

UBS currency strategist Beat Siegenthaler said the Italian downgrade means that there will be less demand from international investors today for the bonds auctioned. He went on to say that while there is the possibility that a short squeeze could drive the euro up, they expect further selling into a bounce.