The euro's rally showed signs of fading on Tuesday, with investors taking profits and sentiment towards the single currency staying fragile as debt worries returned after Moody's cut Greece's credit rating to junk grade.
The Australian dollar pulled back further from a one-month high versus the U.S. dollar as traders reduced demand for higher-yielding currencies after minutes of an Australian central bank meeting confirmed the market view that interest rates will be on hold at least for the next month.
Traders said with the euro EUR= failing to break near term resistance at around $1.23, the single currency's impressive run in the past few sessions was showing signs of fizzling.
"The euro would need more than short-covering to move decisively up from here," said a senior trader at a Japanese securities house, adding that the market looked still vulnerable to euro-negative news given shaky equity markets.
The euro was at $1.2204 EUR=, down 0.1 percent from late New York trade on Monday, retreating further from the previous day's high of $1.2298 on trading platform EBS.
Traders said Moody's downgrade was being used by investors as an excuse to pare positions in the single currency. Moody's cut Greece's credit rating to junk status and said the country faced substantial risks.
The Moody's downgrade could still have an effect in the background, but an overall revival in risk appetite may check sharp losses, traders said.
While resistance is still around the first Fibonacci retracement level at $1.2301, the 23.6 percent of the currency's move from an April 14 high to its June 7 low, support is seen at around $1.2165 on hourly charts.
The euro fell as far as $1.1876 on June 7, its lowest since March 2006.
"Whether the bounce in the euro from $1.19 to $1.22 is more than a brief relief bounce remains open for debate but the sharp reaction to the rating downgrade overnight suggests that sentiment is still extremely fragile," Matthew Strauss, senior currency strategist at RBC Capital wrote in a note.
The euro fell 0.2 percent on the yen EURJPY= to 111.68 yen. The U.S. dollar edged down to 91.50 yen JPY= as sell orders from Japanese exporters were seen capping its gains.
The Bank of Japan's policy decision expected around 12:30-2 p.m. (0330-0500 GMT) and Governor Masaaki Shirakawa's embargoed press conference from 3:30 p.m. (0630 GMT) are the key events on the Asian calendar on Tuesday
The BOJ is expected to announce details of a new lending scheme, but that is unlikely to move the yen, traders said.
The minutes of the Reserve Bank of Australia's June policy meeting said it was able to leave interest rates unchanged in the near term as previous rate hikes gave it time to see how Europe's debt woes would affect the world economy and to wait for more information on domestic inflation.
Board members also said disinflationary forces in the domestic economy had not been as strong as expected and highlighted the importance of coming data on consumer prices, due in late July, reinforcing expectations for steady interest rates at its next policy-setting meeting in early July.
The Australian dollar AUD=D4 fell 0.3 percent to $0.8554, extending its pullback from a one-month high of $0.8665 the previous day when an overall improvement in risk appetite supported demand for higher-yielding currencies. (Additional reporting by Anirban Nag in Sydney; Editing by Michael Watson).
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