(Corrects 11th paragraph to show $1.4036 was four-month not
one-month high)
* Euro down 0.5 percent on day at $1.3830 <EUR=>
* Moody's downgrades Spain; market fears Portugal bailout
* Near-term demand at $1.3800, but longer term losses seen
(Adds quote, detail, updates prices)
By Naomi Tajitsu
LONDON, March 10 (Reuters) - The euro fell on Thursday after
a cut to Spain's credit rating reminded investors that euro zone
debt problems will continue to haunt the currency, keeping it
vulnerable to more downward pressure in the coming weeks.
The euro <EUR=> hit the day's low around $1.3805 after
Moody's downgraded Spain to Aa2 from Aa1 with a negative
outlook, although sovereign demand and technical support
buffered the currency against more intraday losses.
[]
Near-term Fibonacci support was seen at the session trough,
around the 38.2 percent retracement of the euro's rally in
January-February, but its retreat from the psychologically key
$1.40 level this week ultimately points to more euro downside.
UBS FX analyst Geoffrey Yu said the Spanish downgrade showed
the euro zone's debt crisis is far from over, and that investors
have yet to fully acknowledge the risk of Europe's inability to
agree a framework for a debt rescue fund this month.
Analysts said the possibility the European Central Bank may
raise interest rates next month was containing a further slide
in the euro for now.
But they argued the euro could suffer if investors start to
price in the prospect ongoing monetary tightening by the ECB is
unlikely given that the euro zone economy is still struggling to
recover.
"If we start to move down towards $1.37 and $1.36, it will
show that the move to $1.40 was clearly unsustainable," Yu said.
"Fast money will pull out and we could move much lower."
By 1223 GMT, the euro traded at $1.3830, down half a percent
on the day. Traders said that Mideast sovereign accounts picked
up the euro after it hit the day's low, while bids from official
Asian names were seen around $1.3800 and lower.
Technical analysts saw trendline support for the euro around
$1.3775, drawn from lows hit in January and February, but a fall
below that open the door to more losses.
The euro's fall pushed the dollar index higher to trade with
gains of around 0.3 percent on the day <.DXY> at 77.023. Against
the yen <JPY=>, it edged up 0.2 percent to 82.92 yen.
RESCUE FUND CONCERNS
The single currency fell further from a four-month high of
$1.4036 hit on Monday after last week's hawkish comments on
inflation from ECB President Jean-Claude Trichet, which hinted
at an interest rate rise in the euro zone as soon as April.
The time spent above $1.40 was brief, with market players
expecting the focus to be on fiscal issues in the coming weeks,
when European leaders and finance ministers will hold a series
of meetings to tackle debt problems, starting with a euro zone
summit on Friday.
"Today's downgrade may be just the type of kick that the EU
authorities need to come up with a credible, long-term solution
to the debt crisis," said Kathleen Brooks, strategist at
Forex.com.
"After all, Spain is the fourth largest economy in the
currency bloc and its financial collapse could throw the future
of the EZ into doubt."
Investors are sceptical over the potential for progress on
boosting the lending capacity of Europe's bailout vehicle, the
European Financial Stability Facility (EFSF). The deadline for
the fund's framework looms on March 24-25.
The Australian dollar fell after data showed China swung to
a surprise trade deficit in February of $7.3 billion, its
largest in seven years. []
The numbers stirred worries that China's growth could slow
and affect countries such as Australia, which has benefited from
China's expansion. The Aussie dollar was down around 0.6 percent
at $1.0030 <AUD=D4>.
Sterling <GBP=D4> traded 0.3 percent lower at $1.6150,
having slipped a touch after the Bank of England held interest
rates at a record los 0.5 percent, as widely expected.
(Additional reporting by Neal Armstrong; Editing by Ron Askew)
