FOREX-Euro declines; S&P warning weighs ahead of EU summit

Tue Dec 6, 2011 4:35pm GMT

* Euro lower vs dollar as New York session opens

* Euro had touched session high after German data

* S&P warning piles pressure on EU leaders

(Updates prices, comment, adds details)

NEW YORK, Dec 6 (Reuters) - The euro slipped against the dollar for the third straight day on Tuesday, surrendering earlier gains, as investors remained focused on Standard & Poor's euro zone downgrade warning.

Rating agency S&P on Monday placed its long-term sovereign ratings on 15 euro zone countries on CreditWatch negative, which normally means a chance of downgrade within three months. For details, see [ID:nWNA5168]

The warning, which included top-rated Germany and France, came as the two countries announced an initiative, to be discussed at a Friday summit, to impose budget discipline across the euro zone through treaty changes.

Analysts said the warning has put European Union leaders under additional pressure to produce quick results to stabilize markets and regain confidence. If core euro zone nations are downgraded, the European rescue fund will find it tough to attract investor interest in its bond offerings, they said.

"The state of markets is that they are still ripe for consolidation especially until Friday's EU summit," said Alexander Chepurko, foreign exchange analyst at Forex Club.

"There is simply too much European drama going about and now S&P has joined the political debate by offering its opinion right on the eve of the summit."

The euro EUR= was down 0.2 percent at $1.3378 in late morning New York trade, with the session low at $1.3332, according to Reuters data.

It had touched a high of $1.3427 after German industrial orders for October posted their strongest rise since March 2010. Traders expect offers between $1.3430-50 to cap potential gains. [ID:nB4E7LC023]

"S&P generally does not inform us of anything the markets have not already figured out," said Jeffrey H. Bergstrand, a finance professor at the University of Notre Dame's Mendoza College of Business. "This will impact the markets a little, but only transitorily. I expect some selloff of the euro Tuesday, but little sustained impact."

Steve Barrow, head of G10 currency research at Standard Bank in London, said he did not expect the countries to be downgraded by S&P and the EU summit was likely to see some sort of agreement.

"But there is a low tolerance level for investors to build positions especially with an ECB meeting coming up and then the year-end plays," he said.

Until the S&P warning, the euro had received some support on growing expectations of an agreement at the EU summit on Dec. 9, along with deficit-reduction steps by debt-laden countries like Italy. That is expected to pave the way for the European Central Bank to move more aggressively to calm the turbulent euro zone bond market.

The bank has so far been reluctant to buy bonds of heavily indebted states, concerned this would take the pressure off them to sort out their finances, but signaled it may change its stance, depending on what EU policymakers produce.

Still, any bounce is likely to be limited to short-covering, and levels around $1.3550 should offer resistance. Traders said positioning is also likely to be light, heading into a ECB rate decision on Thursday.

The euro rose against the Swiss franc EURCHF= after data showed a growing risk of deflation in Switzerland.

The euro added to gains against the Swiss franc on Tuesday on market talk that the Bank of International Settlements was buying euros on behalf of the Swiss National Bank. The rumor was denied by both the SNB and BIS.

The single currency EURCHF= rose to its highest against the franc since Nov. 17, while the dollar rose 0.8 percent to 0.9271 CHF=. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Factbox on the week ahead [ID:nL5E7N4077] Key points of Franco-German agreement [ID:nL5E7N53AQ] Interactive timeline: link.reuters.com/rev89r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

ECB RATE CUT EYED

The ECB is widely expected to cut interest rates and throw more funding lifelines to stressed banks toiling against the euro zone's debt crisis. Most banks expect the ECB to cut by 25 basis points, with less than a 10 percent chance of a 50 basis point cut, a Reuters poll found. [ID:nL9E7KJ002]

A deeper-than-expected cut could give the euro and other riskier currencies a brief lift, analysts said.

Against the yen, the greenback was little changed at 77.73 yen JPY=, again struggling to break the 78.00 yen barrier.

The Australian dollar fell 0.5 percent after the Reserve Bank of Australia cut rates by 25 basis points and left the door open for further easing AUD=D4. (Additional reporting by Anirban Nag in London) (Reporting by Nick Olivari)