* Moody's cuts Italy credit rating by two notches
* Pound hovers close to 3-1/2 high against euro
* Steady vs dollar near 5-week low, seen driven by euro
By Michael Szabo
LONDON, July 13 Sterling held near a 3-1/2 year
high against a weaker euro on Friday after Moody's cut Italy's
credit rating, sending the country's borrowing costs higher and
putting further pressure on its struggling economy.
The euro edged down 0.1 percent against the
pound to 79.02 pence, in sight of a 78.71 pence trough hit on
Wednesday, its weakest since late 2008.
Analysts said trade in sterling would continue to be guided
by sentiment towards the euro, which remained vulnerable to
further declines against a range of currencies.
"The trend is still being determined by the euro and cable
(sterling/dollar) is being dragged with it," said Adrian
Schmidt, FX strategist at Lloyds TSB.
He said that should the euro lose further ground against the
dollar on the back of the Italian downgrade, sterling could rise
to test the 44-month high against the common European currency.
"However, it's Friday and euro/dollar's been falling all
week ...so I'm not sure the market has that much appetite to
sell off more aggressively today," he added.
Against the dollar the pound was steady at $1.5433
after hitting a five-week low of $1.5393 on Thursday. Further
losses were possible against the safe-haven U.S. currency if
euro zone debt worries increased and markets turned more
risk-averse, analysts said.
Moody's unexpectedly cut Italy's sovereign rating by two
notches to Baa2, just two notches above junk status. It warned
it could cut it further if Italy's access to debt markets dried
up, potentially meaning more pain for the euro.
The downgrade pushed Italian 10-year bond yields back above
6 percent and came at a particularly bad time as the country
will later on Friday try to sell 5.25 billion euros in bonds.
Meanwhile, China's economy grew 7.6 percent in the second
quarter of 2012 from a year earlier, representing the slowest
pace in three years. But the data met forecasts and lifted
equity markets as it eased worries of a sharp slowdown in the
world's second largest economy.
(By Michael Szabo; Editing by John Stonestreet)